May 15, 2025

The Reality of Starting a Business: What You Should Know About Formation and Preparation

By the Law Offices of Michael Kuldiner

Starting a business is an exciting endeavor, but it’s also a legally complex process that requires careful planning and proper structure. As a business formation lawyer, we work with entrepreneurs every day who are eager to launch their ideas but may not fully understand the legal realities behind turning a vision into a functioning business entity.

Whether you’re forming a corporation, limited liability company (LLC), joint venture, or general partnership, there are critical steps and legal documents that must be in place to protect your interests, prevent disputes, and position your company for long-term success. Here’s a breakdown of the key elements you need to consider before officially opening your doors.

1. Choosing the Right Entity: More Than Just a Name

The first decision you’ll face is which legal structure best suits your business. Each entity type has its own benefits, drawbacks, and compliance requirements:

  • Corporations are ideal for businesses seeking to raise capital through investors or go public. They offer strong liability protection but require strict formalities like shareholder meetings, bylaws, and regulatory filings.
  • Limited Liability Companies (LLCs) are popular for small to mid-size businesses. They offer liability protection and flexibility in taxation (you can choose to be taxed as a partnership or corporation), without the formal structure required by corporations.
  • General Partnerships are simple to set up, but they expose each partner to unlimited liability. Unless properly documented, this can lead to serious financial risk.
  • Joint Ventures are short-term or project-specific business arrangements between two or more parties. These also need clear agreements outlining each party’s roles, responsibilities, and profit-sharing.

No matter which entity you choose, it’s essential to understand the implications for taxes, personal liability, and future growth.

2. Filing and Compliance: Getting the Foundation Right

Once the entity is chosen, formation involves filing the appropriate documents with your state’s Secretary of State office (e.g., Articles of Incorporation for corporations or Articles of Organization for LLCs). But filing alone isn’t enough.

You’ll also need:

  • An Employer Identification Number (EIN) from the IRS
  • Appropriate state and local business licenses
  • A registered agent to receive legal notices
  • Ongoing compliance filings, such as annual reports and franchise taxes

Skipping any of these steps can result in penalties, loss of good standing, or even dissolution of your entity.

3. Operating Agreements and Bylaws: The Blueprint of Your Business

An often-overlooked but critical step is drafting your internal governance documents. For corporations, this means bylaws; for LLCs, it’s an operating agreement.

These documents establish:

  • Voting rights and decision-making procedures
  • Profit and loss distribution
  • Rules for admitting or removing owners
  • How disputes are handled
  • What happens in the event of dissolution or sale

Without a comprehensive operating agreement or set of bylaws, you leave your business vulnerable to conflict, mismanagement, and costly litigation.

4. Shareholder Agreements: A Must-Have for Corporations

For corporations with more than one owner, a shareholder agreement is essential. This contract governs the relationship between shareholders and covers vital provisions like:

  • Restrictions on transferring shares
  • Rights of first refusal
  • Buy-sell agreements upon death, disability, or departure
  • Non-compete and confidentiality clauses
  • Dividend policy

Shareholder disputes can cripple a business. A well-drafted shareholder agreement helps prevent confusion and sets clear expectations from the outset.

5. Contracts: Your Business’s First Line of Defense

No matter your entity type, your success hinges on strong, enforceable contracts. At the formation stage, consider preparing:

  • Service agreements with clients or customers
  • Employment or independent contractor agreements
  • Non-disclosure agreements (NDAs)
  • Vendor and supplier agreements
  • Lease agreements, if you’re renting space

These documents protect your revenue, your intellectual property, and your relationships with employees, clients, and partners.

6. Planning for the Future: Exit Strategy and Succession

It may seem premature to plan for an exit when you’re just starting, but every smart business has a long-term strategy. This could involve:

  • Succession planning
  • Merger or acquisition readiness
  • Estate planning for closely-held businesses
  • Transition strategies for retiring founders

Incorporating these ideas early into your formation and governance documents gives your company stability and makes it more attractive to investors or buyers.

Final Thoughts: Don’t DIY Your Legal Foundation

The reality is that too many startups try to cut corners by using online templates or skipping legal guidance altogether. Unfortunately, this often results in costly mistakes that could have been avoided with the right legal advice upfront.

As a business formation attorney, our role is to help you build a solid legal structure that supports your goals, limits your liability, and gives you room to grow. Every business is different—don’t settle for one-size-fits-all paperwork. Invest the time and resources to get your formation done right the first time.