United States: Venturing Into The World Of Venture Capital

A Primer For Startups

GETTING STARTED

Business Plan

Whether you are looking to start or grow your business, entrepreneurs are well advised to develop a business plan.

While a stellar business plan is no guarantee of success, your plan will provide the roadmap to achieve the success you desire. The question should not be if you create your plan, but how to formulate a plan that will take your company where you want to go.

We believe that the research and disciplined analysis involved in crafting a convincing business plan are integral steps in preparing to launch a venture.

Numerous decision points and unanticipated challenges will arise—your well-crafted business plan provides a framework for responding to these decisions and challenges.

The best plans will anticipate and provide convincing answers to the following questions:

Proposed Product/Service

  • Is the value proposition sound, articulated clearly and evaluated comprehensively?
  • How original, innovative and thoughtful is the product/service?
  • How will the business differentiate itself from the existing competition?
  • How does the plan describe the user experience?
  • How does the plan address relevant risks?

Preparation For Launch

  • Does the plan clearly identify a target market and customers?
  • Does the team have a plan for developing relationships with key market participants?
  • Do the financial projections reflect an understanding of the economics and potential growth opportunities or downside risks for the business? Are the financial projections comprehensive and realistic?
  • How does the plan outline the business' core revenue model and ancillary revenue streams?
  • Please evaluate the team's traction-to-date regarding product development.

Execution Plan

  • Does the plan clearly outline future measurable, achievable milestones?
  • Please rate the team's marketing strategy. How will they reach their target market segment?
  • Please rate the team's sales strategy and progress. How will they sell to their first customers?
  • How does the plan outline the plan to scale the business?
  • Do the founding team members have sufficient expertise to launch the business? Does the plan address any needs for additional key people and strategies to attract these individuals?

Choice Of Entity

Starting a new business involves prudent decision-making and thorough planning from the day the idea first enters one's mind, to implementing the concept and getting the business up and running, and finally, to ensuring that one's operation will remain a viable, burgeoning success.

One of the first steps in establishing a business is determining the appropriate structure, which will in turn, affect the business' taxation, legal and financial liability, and decision-making authority.

There is no magic business structure that will make all legal risks and problems disappear, and each person or group of people, must make the choice based on their specific goals and personal preferences. Beyond the actual decision of which structure to pursue, each option carries with it its own unique, concrete steps one needs to follow in order to start a business under that specific structure, as well as certain governance issues that may arise.

Common Types Of Legal Entities

Corporation

A corporation is a very common form of legal entity for a for-profit business. It is created by filing a Certificate (or Articles) of Incorporation with the applicable state official (generally the Secretary of State) in the state where the corporation is formed. The Certificate of Incorporation encompasses the "constitution" of the company, establishing the basic economic and voting rights of the owners—referred to as stockholders or shareholders. These rights can be complex, but the fundamental powers include the right to elect a Board of Directors, the right to vote on fundamental changes to the corporation or its business, and the right to a share of proceeds after creditors have been paid in the event of a sale of the company. A corporation may be referred to as a "C" corporation or an "S" corporation. These designations evidence the applicable sections of the Internal Revenue Code that affect the respective tax status of the corporation. However, all corporations are treated as a "C" corporation for tax purposes unless a special "S election" is specifically made with the IRS. The C Corporation is the entity of choice for ventures seeking outside capital from angel investors, venture capitalists or other institutional investors, mainly because C Corporations allow for an unlimited number and type of shareholders and various classes of stock with differing rights. S Corporations, in contrast, can only have one class of sock, are limited to 100 stockholders, and can generally only have U.S. individuals as stockholders. It should be noted that one glaring disadvantage of the C Corporation is that it is subject to "double taxation"—the corporation itself must pay federal (and, where applicable, state) income tax on its profits and capital gains. Again, when these profits are distributed as dividends to the corporation's stockholders, each stockholder is typically taxed on his or her respective share of those dividends.

Limited Liability Company (LLC)

An LLC is created by filing a Certificate (or Articles) of Organization (or Formation) with the appropriate state agency. The owners of an LLC are usually deemed members rather than "shareholders" or "stockholders." Generally, the LLC members will elect "managers" who govern the LLC analogously to how a Board of Directors manage a corporation. While the Certificate of Formation tends to say little with respect to the ownership or governance of the LLC, the members instead enter into an "Operating Agreement" in order to prescribe the economic, voting, and other explicit rights of the members and managers. Indeed, in many ways an LLC can resemble a corporation, although different terminology is employed. However, LLCs differentiate themselves in at least one crucial respect—tax treatment. Akin to S Corporations, LLCs are ordinarily "pass-through" entities—normally treated as a partnership for federal and state income tax purposes. In this respect, the LLC itself does not owe tax on income that it earns, but instead, the owners are treated as the recipients of their respective share of the income and owe any corresponding taxes.

The following charthighlights the key differences between the five most common business forms, and the most important categories of issues one should consider in choosing an entity.

To read this Handbook in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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