Getting your company incorporated can be a very busy time for you. Handling the legal matters is just another thing piled on to preparing business plans, marketing strategies, etc. There are few errors that can’t be reversed with the help of legal counsel but dealing with things correctly and professionally in the beginning can save you precious time and resources.
It’s important to institute a corporate structure that is easily adaptable to changing business and financing needs. Susan Schreter, a coach that helps entrepreneurs find reliable investors recently tapped into the expertise of Joe Whitford, a law partner with Davis Wright Tremaine and long-time advisor and advocate of productive venture building. He discussed the 6 most common mistakes he is often called in to correct. Take care to avoid these mistakes as you incorporate your business:
1. Only Authorizing Common Stock-It is recommended for young companies trying to raise capital should issue both common and preferred stock and business founders should only receive common stock. Depending on the state and the tax implications, 30 million common stock shares and 20 million preferred stock shares are recommended.
2. Over allocation of Shares-Many companies dole out too many shares to founders, initial employees, and consultants. This leaves too few for actually raising capital and growing the business. It is recommended that only ¼ to 1/3 of shares are allocated to these people in order to leave an ample amount for raising funds.
3. Establishing a High Initial Stock Value-The Internal Revenue Service requires stock recipients to pay tax on the estimated market value of the shares, which can be very costly if those valuations are set too high.
4. Granting too lenient shareholder rights-Entrepreneurs should not include provisions in the articles of incorporation that allow shareholders to acquire additional shares in future financing transactions. These rights should be negotiated on a per transaction basis.
5. Invention Assignment-Many companies do not take due diligence in documenting the ownership of inventions by founders and new employees. By not declaring an invention as being owned by the company rather than an individual, funding opportunities and technological alliances can be lost.
6. Not including shareholder agreements with company founders-It is always best to detail the duration of services with founders who receive stock in a company in order to retain certain rights to one or more individuals that may lose interest in a company.
Avoiding these 6 mistakes can save your company a lot of hassle. Turn to the online business incorporation leader MaxFilings to assist you with forming your company and find other important information in the Knowledge Center at MaxFilings.