Common Mistakes - Forming your Texas Business
Post by: Lesley Hempfling
This is a short list of mistakes that I have seen clients make before they hire an attorney to assist them in starting their business.
Paying for a Domain with the name you want to use and investing in other marketing materials before confirming with the Texas Secretary of State that your name is available for use.
I have had many clients come into my office with their domain secured, signage and other marketing materials prepared ready to formally form their businesses only to find that the name they have secured a Domain for is already in use by someone else and is not available in Texas. This causes a lot of unnecessary stress and expense that could have been avoided.
The Texas Secretary of State has many rules regarding the use of names and if yours is the same as or similar to an already existing Texas business, your Certificate of Formation will be rejected. The best way to avoid this is to have your attorney search the records to determine if your name is available and then to formally reserve that name for your use. Once your name is reserved, the reservation is exclusively yours for 120 days. This allows you time to handle other pre-formation matters without being concerned that someone else may secure the name you want before you do.
Failing to confirm with other agencies that the name you want to use is available and not already in use by someone else (e.g. Federal & State Trademark Offices).
Even if your name is available with the Texas Secretary of State, there is a chance that it is not available under state or federal trademark law. The Texas Secretary of State will not confirm that the name you have requested is available under state or federal trademark law. Make sure to check with these offices before you invest too much time and money into the name you want to use, otherwise you may end up receiving a "Cease and Desist" letter from someone who has a trademark or service mark for the name you want to use.
Signing third-party contracts in your name, making personal guarantees and using personal bank accounts on behalf of the business before legally forming your business entity.
If you start signing contracts and other agreements with third parties before you have formally established your business, you will be held personally liable under those agreements. One of the reasons that many people establish formal business entities is asset protection. Signing "individually," rather than, as a Member of your LLC or Shareholder of your Corporation will place liability on you rather than the business entity. Avoid this trap - file your Certificate of Formation before you enter into business contracts.
Misinterpreting the Secretary of State Forms or other Forms required for formation of your business entity.
The Internet is full of "forms" that are intended to streamline the legal process and to be more economically efficient for the non-lawyer who needs something "simple." The problem that I have seen with non-lawyers using online forms is one of misinterpretation. If you do not understand the terms in the questions that are being asked in the forms, then more than likely you will make a mistake in the form and end up having to amend or completely start over. This ends up being more expensive and less efficient than it would have been if it were done correctly the first time.
Failing to have your Organizational and Governance Documents prepared and to respect the formalities of your business entity.
Many times clients believe that filing their Certificate of Formation with the Texas Secretary of State is the first and last step in the process of forming their business entity. This is particularly true where there is one single Shareholder of a Corporation or Member of an LLC. It is imperative for multiple owner businesses, and maybe even more so for single owner businesses, to have properly drafted Organizational and Governance documents in place before they begin to operate their business entity. Having these documents in place and adhering to these documents will not only legitimize your business entity down the road if it is ever in dispute, but it will also establish methods for resolving disputes among owners and allow owners to agree and negotiate exit terms at the outset. Properly drafted and negotiated Organizational and Governance documents are essential to the smooth operation and dissolution of your business entity.