Choosing the wrong corporate form

When starting a business, most entrepreneurs focus heavily on the product they are developing, how it can make customers’ lives better and how it can be rolled out on the market – and that’s a noble goal, but, once the first exciting, informal years go by and the company becomes more stable, many executives realize that they chose the wrong business structure. Terms like sole-proprietorship, partnership, limited partnership, corporation or limited liability company sound very vague at first, but understanding what each structure implies is essential if you want to avoid legal complications in the future.

Disagreements between shareholders

When you share the same vision with a friend, family member or colleague, starting a company together sounds like an ideal solution, especially because you can distribute tasks, bounce ideas off each other, share the workload and the financial burden. However, once they pass the “work from the parents’ garage” stage and move into actual offices, there are very few, if any cases of companies where shareholders and co-founders don’t have a misunderstanding. Sometimes, one of the shareholders might prefer a different path for the company or wants to quit to pursue a different endeavour.

Thinking about this isn’t fun, but, no matter how well you get along with your shareholders and no matter how much you trust them, you shouldn’t start working together without a solid shareholders agreement. This is an essential legal document that outlines the rights and responsibilities of each shareholder, how the company is going to be run, who takes important business decisions and what happens with the company if one of the shareholders wants to leave. Without this document, a business can drift afloat and it may even dissolve as soon as there are differences of opinion between shareholders.