10 Questions From Young Entrepreneurs About Startups

10 Questions From Young Entrepreneurs About Startups

forbes.com

More and more young entrepreneurs are launching their own companies. Here are answers to their most … [+] common questions.

The young entrepreneurs I counseled had some great, creative ideas for different startups, and many of them had already gotten some early traction in their businesses. They also had some great questions—questions that many entrepreneurs, young or old, have about starting, growing and financing a business. So I thought I would share my answers to those questions here.

The founders of a company must initially determine whether to organize the company as a limited liability company (LLC), general partnership, a sole proprietorship, or a corporation. If formed as a corporation, the company must also determine whether to file an election to have it taxed as an “S corporation” rather than a “C corporation.”

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their stockholders for tax purposes. Stockholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates (so called “flow-through taxation”). This allows S corporations to generally avoid double taxation on the corporate income.

A C corporation under federal income tax laws is one that is taxed separately from its owners. Generally, all for-profit corporations are classified as C corporations, unless the company validly elects to become an S corporation. A C corporation does not have limits as to who could be the stockholders (as S corporations do). And C corporations may have different classes of stock (such as preferred stock and common stock), which is not allowed for S corporations. Venture capitalists will typically only invest in preferred stock in a C corporation.

An LLC is another entity that provides limited liability to its owners the way C and S corporations do, and an LLC also provides flow-through taxation to its owners.

For a comprehensive discussion of tax issues in startups, see Pay Attention to These 9 Essential Startup Tax Issues.

Corporations are formed pursuant to a state’s laws. Many people recommend incorporating under Delaware law, but my preference is to incorporate in the state where the business is located, as this will save you some fees, filings, and complexities. You can always reincorporate later in Delaware if desirable.

Ideas are a dime a dozen; it’s the actual implementation of an idea that is more important. If it’s truly unique, get a patent for it (visit www.uspto.gov). You may get some protection through copyright, trade secret programs, or NDAs—but not a lot (see The Key Elements of Non-Disclosure Agreements). You can’t worry too much about someone stealing your idea. The best thing to do is implement the idea and get a lot of traction for it.

If you think there is no competition for your idea, you are likely dead wrong. I’ve had multiple entrepreneurs over the years tell me they had no competitors, something I was able to quickly disprove with a simple Google search.

There is no one correct answer to this question. But you should discuss it with your co-founders and agree upon it up front to avoid any misunderstandings later on. If you are the original founder and the brains behind the idea, a good argument can be made for more than 50% ownership. The split should take into account the following:

If you are not a technology expert, and technology is going to be crucial to your startup, then it will be helpful to have a technical co-founder (or, at the very least, a senior-level hire who can handle the key technology functions). Investors and incubator programs like Y Combinator often like to see technology-oriented co-founders. But that doesn’t mean you have to give this co-founder 50% of the equity.

This can be difficult. First, brainstorm a bunch of different names, then do a Google search to see what is already taken—I’m betting this will eliminate 95% of your choices. Make it easy to spell. Make it interesting. Don’t pick a nonsensical name so people won’t have a clue as to what your business actually does (with all due respect to “Google” and “Yahoo”). Do a trademark/tradename search on the name, then make sure you can get the domain name (see 12 Tips for Naming Your Startup Business).

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