NATIONAL Small Business Week snuck up on us this year. Much to our delight, it coincides seamlessly with where we are in our Law of Fashion series. Last week, DJ Hargrave sat with us and explained the business of Tailor Made Style, its composition, its strengths, its needs and its aspirations. This week, as the national small business scene moves into the spotlight, we take those Tailor Made measurements and stitch together a legal framework for DJ’s business to step into; one that will protect the success its already realized and posture it for future milestones.
The information to follow here is not new or groundbreaking by any stretch of the imagination. That is to say that the fabric of legal infrastructure and decision-making is largely the same regardless of the nature of the business at issue or the industry to which it belongs. So why spend time reiterating a topic Carolina Craft Legal has dealt with before? Well, there are a couple of reasons. First, it is to underscore exactly that sentiment—that even a business model as newly casted and social media driven as Tailor Made Style should be hemmed with the entity formation basics. Every business, like every decent look, should have a solid foundation. And secondly, like DJ, our commitment to utilizing innovative techniques in our practice does not diminish the need to apply the fundamentals whenever necessary and proper. To analogize, DJ may have great insight on F/W ’16 trends, but if he can’t throw together a decent four-in-hand every now and again, how does his brand build trust?
As applied to the business formation fundamentals, there are four (4) bits of information gathered from DJ’s consultation that steer our thoughts about how someone in his position should ultimately organize their business:
(1) DJ is the sole owner and still a student. This really just points to what sort of time and resources he will have to allocate to corporate formalities. Because he has no partners sharing accountability and because maintaining a full class schedule commands on average 15-18 hours per week just on attendance (let alone the accompanying work), DJ’s time to spend on developing Tailor Made Style is limited. The structure of the business should thus minimize the effort it takes to observe the associated formalities—meeting minutes, quarterly filings, audits, etc.
(2) DJ is signing advertising, sponsorship and marketing contracts with large companies. There’s an interesting duality here. First, formal legal structure almost always signals a level of sophistication within the marketplace inviting other companies to do business. Because DJ has locked down a short-term contract with a corporate partner, he has the ability to convince that partner to think seriously about more long-term deals as well as communicate Tailor Made’s sophistication to other corporate retailers within arms-reach. Second and more obvious is the fact that the existence of a contract is an acknowledgment that an agreement may be breached. DJ thus requires an entity that will give him the personally liability protection we’ve spoken of before in the event things do not go according to plan.
(3) DJ has clear and predictable operating expenses and a cause for reinvestment. This speaks directly to a small business’s need for a tax structure that maximizes reinvestment dollars and efficiently passes income through the business to the member(s). DJ mentioned the use of software, cameras and other technology, as well as plans for paying employees and independent contractors in short order as his business grows. A common reality with startups is the need for liquidity to continue spending on an as-needed basis in an effort to keep the business growing in the formative stages. The less of this operating cash that is subject to state and federal taxes, the better.
(4) DJ articulated plans for growth and a desire for product development. Product development takes dollars. Aside from the primary business, there are two basic ways to generate the money needed: taking loans or giving equity. Either way, DJ is better positioned to attract investment funding with formal structure around the business and a blueprint for how any independent funding will ultimately lead to long-term growth for Tailor Made Style. Taking a loan would of course preserve his complete ownership of the business, but giving equity often incentivizes new members to put effort and guidance into the business to insure the success of their investment. Both have their respective upsides, but the one certainty is that formal organization is the key to finding necessary capital.
All told, the limited liability company, affectionately known as the LLC, is perhaps the most advantageous entity choice for businesses like Tailor Made Style. It removes the burden of (most) corporate formalities, provides the benefit of a liability shield, allows for flexible taxation and gives the structure necessary to attract outside funding. To reference the business law basics of LLC formation and its comparison to other corporate varieties, tap here and here. Tailor Made Style and Carolina Craft Legal continue this journey next week with a look at formal brand management and the layers to protecting the business. As always, we sincerely appreciate you scrolling through.
Until next week. Cheers!