Congratulations, you’re a business owner with a legal entity in place! But now what? This guide is for founders who’ve recently formed their first company and are wondering how to keep it running smoothly. Below are frequently asked questions we receive after entity formation, focused on Corporations and LLCs, which are the most common entity types.
How and by whom will my company be managed?
The answer depends on the type of entity you’re operating.
There are three main levels of corporate management. Shareholders (the owners of the corporation) have authority to vote on decisions that impact the structure of the corporation and, importantly, elect who will serve on the board of directors. A corporation is primarily managed by the elected board members, who are in charge of major decisions that can impact the company’s direction and value. Directors are also responsible for appointing officers, and officers are charged with managing the day-to-day affairs of the corporation.
In Indiana, an LLC is managed by its members (the owners of the LLC) by default. That default can be modified by simply noting that the LLC is to be managed by managers on the articles of organization (which we typically recommend). The convenient part is that members can be managers too, so having a manager-managed LLC allows the members to retain their equity while also having flexibility as to who else (in addition to members) can serve as a manager. Some states, including Indiana, allow members of LLCs to determine whether the LLC should also have officers.
What core documents do I need at this stage?
Governing Document – This document sets out how the business will operate and includes important terms such as management roles, decision-making and voting procedures, and any restrictions on transferring ownership in the company. For a corporation the governing document is the bylaws, and for an LLC it’s the operating agreement.
Stock or Unit Purchase Agreements – These documents issue equity in the form of shares of stock for corporations, and membership units for LLCs, and both often include “vesting” provisions structuring the rights in the equity to be vested over time and in connection with performing services for the new company. Founders can execute purchase agreements, and other parties can too depending on the circumstances.
Intellectual Property (“IP”) Assignments – When someone signs an intellectual property agreement they transfer their rights in intellectual property created for the business to the company. This document also includes terms to protect the company’s confidential information both during and after the relationship between the founder and the company. This is also something founders and other parties can sign.
Organizational Resolution – This document allows company management to appoint specific individuals to the management roles set forth in the governing document, authorize initial grants of equity, and approve other company actions taken during the formation stage.
How do I protect the company’s intellectual property (IP) and why is that important?
Protecting the company’s IP is critical because, more often than not, the IP is the core of the business and its value. IP should be protected against competing interests of founders, employees, contractors, customers, and partners—everyone.
As mentioned above, founders can (and should) sign IP assignments, and the same is true for employees and contractors. As for other parties such as customers or partner companies, IP protections should be written into the agreement with that party so that it’s clear that the company’s IP rights are retained by the company.
In addition to contractual protections, it may make sense to consult with an attorney about more formal forms of IP protections such as patent, trademark, or copyright filings, all depending on what it is you wish to protect.
The important takeaway here is that any time anyone is going to have access to the company’s IP, some form of protection needs to be in place.
How do founders, employees, and contractors receive equity, and what documents are used?
Founders typically receive equity at initial issuance when the company is formed. As noted above, founders can execute a restricted share (corporation), or unit (LLC), purchase agreement that will set forth the price per share or unit, the total purchase price, and other important terms such as vesting.
Employees and contractors can receive equity through an equity incentive plan (EIP) developed by the company. Under the EIP, each employee and contractor should sign an individual option grant agreement. The grant agreement should always include terms such as the number of shares or units subject to the option, the exercise price, and vesting if applicable. It’s worth noting that where there isn’t an EIP, there’s also the option for employees and contractors to receive equity under a purchase agreement.
“Vesting” is an important concept in equity grants. It essentially tells the recipient: “The company will grant you equity over time, but only if you remain with the company and provide value for a set period.” Typical vesting terms include 25% vesting after one year, with the remainder vesting equally over the next 36 months (a four-year vesting schedule with a one-year cliff).
Another important topic with vesting is the 83(b) election. This tax election allows individuals receiving equity subject to vesting to pay taxes at the time of grant rather than when the equity vests. Because shares or units are often less valuable at grant than at the time of vesting, this can significantly reduce tax liability.
Important: The 83(b) election must be filed within 30 days of grant—consult a tax advisor promptly if this applies to you.
What are the biggest mistakes founders make at this stage?
Big Mistake #1: Documentation Failures– This is especially problematic when there are co-founders. Without governing documents (bylaws, operating agreement, IP assignments, stock purchase and vesting agreements, etc.), there is no formal agreement among co-founders—which can lead to significant problems down the line. It’s best to establish governing documents early, when co-founders are typically more aligned. As the stakes increase, reaching agreement often becomes more difficult.
Big Mistake #2: No Liability Protection for the Company – If you’ve formed an entity, you probably understand the protection that you, as an individual, have from personal liability when it comes to acting on behalf of your business. This is great, but don’t forget to protect the company too! This can be as simple as having the proper insurance coverage, and accounting for contractual protections such as warranty disclaimers and financial caps on liability.
Big Mistake #3: Failing to Protect IP – As discussed above, protecting your company’s IP is essential. A common pitfall for early-stage businesses is giving away more than necessary—whether through over-licensing or assigning IP rights that should remain with the company. If you’re uncertain whether your IP protections are adequate, consult with an attorney.
Big Mistake #4: Ignoring Annual Compliance – After formation, most states require ongoing filings such as annual reports and, in some cases, franchise taxes. Failure to file or pay on time can result in administrative dissolution—meaning your entity could lose its good standing or even be involuntarily dissolved by the state. Set calendar reminders and stay current on these requirements to avoid unnecessary headaches.
If you have any post-formation questions, please give us a call at 317.423.7900 or send us an email at info@gutweinlaw.com.
This blog post is part of our 5-part series on Fundraising for Startups. To view other parts of the series, click the links below:
