Friday, April 5, 2013

Forming a Fashion Start-up Business



Primarily it takes inspiration, motivation, hard work ethic, good planning and adequate capital to start a successful fashion business.  You should choose a unique name for your business. And this name should be on file with the county or state and identifies the business entity. Also, this name is different from the brand name, which we will discuss in a later post.
Next you should, select a form of business entity- most fashion companies based in the United States are formed either as corporations or limited liability companies. Both types are created by state law and vary by state law.  

     A.     Business Formation
1.      Sole proprietorship- simplest form of business in which the individual is personally liable for all the debts of the business. The rule that I have always been told about starting a business is NEVER HAVE A SOLE PROPRIETORSHIP. Why? Because if your business flops, you are personally liable. Your personal bank accounts will get hit. So most people cover themselves by forming a limited liability company or partnership (LLC/ LLP) (see next)

2.      Partnership- operated by two or more people.
2a. Limited Liability Partnership- a partnership created to allow the owners to limit their liability to the amount of money they have invested in the company. Essentially, the liability of the owners is generally limited to the amount of capital the owners invest in the company.
2b. General partnership- a partnership without an entity where each partner is liable for the obligations of the partnership. One way to deal with the partnership risks is to create a written partnership agreement which analytically describes the way the business will be managed, the way the profits and losses will be allocated, and the ways in which partners may withdraw from the partnership.

3.      Limited Liability Company (LLC)- This is the most common type of business structure. It is more flexible than a corporation in that it does not require a BOD and officers, annual meetings, and keeping meeting minutes; but state law requires each LLC to have an operating agreement.  An LLC is similar to a general partnership in which the partners have a limited liability. Owners of an LLC are called members.

4.      Corporation- formed when the incorporator files a certificate of incorporation in the office of the secretary of state. The certificate includes the name and purpose of the corporation. Owners of the corporation are called shareholders. Any changes to the certificate must be amended by filing a certificate of amendment with the state.  

Some of the formalities that a corporation requires are listed below:

1.      Capitol Structure- reflected in the certificate of incorporation is the number of authorized shares of stock.

2.      Incorporators-  the person who files the certificate of incorporation.

3.      Board of Directors (BOD) and OfficersTypically, the BOD directs the company to issue stock to the initial investors or founders in the initial meetings. The BOD will specify the number of shares, the price to be paid per share, and the names of the people to whom the initial shares will be issued. A corporation must hold annual meetings of shareholders and directors. Actions of the BOD usually require a majority vote so it is preferred to have an odd number of BOD’s to avoid deadlock vote.

4.      Shareholders- owners of the corporation who elect or reelect directors, meet at annual board meetings, and are issued stock from the corporation. Shareholder’s agreement  is preferred because it establishes the framework for the management of the company and transfers of ownership

5.      Minute Books- the by-laws and records of all meeting minutes are all held in the minute books.

No matter what entity you choose, obtain an Employer Identification Number for tax purposes. This number is also called an SS4 and can be obtained from www.irs.gov

We can’t forget this business principle: it takes money to make money. Now let’s look into the type of financial investments a fashion start-up should consider.

    B.     Funding Types

1.      Seed Capitol is money from founders.

2.      Outside investments are also called Angel Investors. State and federal securities laws will come surely arise so it would not hurt to seek a securities lawyer.

3.      Institutional investors or Entity Investors usually seek a large sum of money and seek a large prospect growth. These investors have an end goal of an initial public offering (company stock offered for sale to the general public so investors can sell its ownership interest eventually for a profit on open market); also, insert a securities lawyer here as well.

Also a fashion lawyer is a great investment to help you draft and file any of the necessary documents and agreements. Essentially you can do all of this yourself, but it may be hard to dot all I’s and cross all T’s when forming a business so a fashion lawyer is a great accessory to make sure that your business maintains order.

***Disclaimer: none of the content in my blog = legal advice and should not be used in place of attorney advice. ****

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