Today I’ll get right to it: You need to have good communication with your partner from the start or else you’ll fumble your initial corporate documents.

For example, if a multiple-owner corporation’s bylaws are less than 7 pages, that tells me the corporation’s co-founders did not have enough discussion about how their corporation should be managed, operated, transferred, sold, or liquidated. Or worse, they did have the requisite discussion but failed to implement their discussion into their corporate documents.

Since most startup company co-founders are entering into a venture with each other for the first time, the natural tendency is to avoid anything that may rock the boat. Who wants to squabble with their partner from day 1? Alternatively, enthusiasm and optimism for the new venture precludes the co-founders from discussing negative issues. Who wants to talk about “failure” when you are just starting out, right?

Both approaches have negative consequences for your initial corporate documents. Not wanting to rock the boat and unwillingness to talk about negative issues will prevent your corporate documents from becoming a comprehensive set of rules for your startup company. And when something happens with your startup company, your corporate bylaws may not be of any help.

So lay it all out on the table from the start. Discuss what should happen if one of you gets an offer to sell your shares. Talk about your respective roles in the corporation and how your corporate documents should reflect and protect such roles. And then implement your discussions into your corporate bylaws. Not only will such frank discussion help ensure your initial corporate documents better fit your startup company, but it will also lay the foundation for future open communication between you and your partner.

Filing for S-corporation status with the IRS requires compliance with strict time guidelines. Form 2553 must be filed by the 15th day of the third month after your corporation’s fiscal year. For most corporations, that means you must file by March 15 for the S-Corporation election to be effective for the current fiscal year.

If you file Form 2553 late, your election to be an S-corporation becomes effective the next fiscal year. However, if you qualify, you can file late and make your S-corporation election retroactive using IRS Revenue Procedure 2003-43. Your corporation will qualify to file Form 2553 late if:

1. Your corporation intended to be an S-corporation as of the intended effective date on your Form 2553;

2. Your corporation failed to obtain S-Corporation status solely because it did not file Form 2553 on time;

3. The original due date of your Form 2553 was less than 2 years ago;

4. Your corporation had reasonable cause or inadvertently failed to file form 2553 on time;

5. Your corporation has not filed tax returns for the year(s) it intends to be an S-Corporation (or your corporation filed tax returns as an S-Corporation using Form 1120S);

6. You file Form 2553 within 6 months after the original due date (no extensions) of the first tax return for which your corporation intended to be an S-Corporation; and

7. All of your corporation’s shareholders have not reported income in a manner inconsistent with your corporation’s intention to be an S-Corporation.

If you meet these requirements and wish to file a late election for S-Corporation status, write the following language at the very top of your Form 2553: “FILED PURSUANT TO REV. PROC 2003-43″ and include a statement, on a separate sheet, addressing requirement #4 above. And make sure all shareholders sign both documents.

I normally don’t post about current events, but the following subject matter is too good to keep to myself. And I’m sure there’s a copyright lesson for your startup company somewhere here…

Nixon Peabody LLP, a tremendously large law firm, is furiously trying to prevent distribution of their corporate song on the internet. The law firm already pulled the song’s Youtube video down and is currently threatening Above the Law, a blogging site about law firms, with copyright infringement for keeping an MP3 of the song on the site.

After you listen to the song you’ll know why. Just be prepared to have their jingle stuck in your head for the next several hours.

CNNMONEY.com is running a series called “America’s Best Colleges For Entrepreneurs.” One of its feature articles is titled Is it smart to go to school for entrepreneurship? in which 9 entrepreneurs tell their story about how taking classes affected their businesses. The 9 different types of entrepreneurs profiled are:

-The Professional
-The Undergrad
-The E-Learner
-The Hybrid
-The Idea Guy
-The MBA
-The Serial Entrepreneur
-The Owner
-The Heir

The problem I have with the article is that ALL of the profiled entrepreneurs took some type of entrepreneurship course, whether a certificate course or full-blown MBA program. What about the non-traditionally educated entrepreneurs? Nothing against MBAs as professional education is a valuable commodity, but spending $100k on your education isn’t exactly a great way to bootstrap your startup.

In any event, what type of entrepreneur are you? And have you had any formal education? I guess my law degree qualifies me as ‘The Professional’ type and my only formal entrepreneurship education is reading books.

When you incorporate your startup company, two main decisions arise. First, what type of entity should your startup company be? Second, where should you incorporate?

Of the two, entrepreneurs focus primarily on choice of entity–LLC, Corporation, etc.–and usually just incorporate in their home state. And home state incorporation will make sense for most. But for a few startup companies, incorporating in a foreign state like Delaware, will be a better decision.

Delaware’s division of corporations lists 4 reasons to incorporate in Delaware on its website:

Why Choose Delaware as Your Corporate Home?

More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500. Businesses choose Delaware because we provide a complete package of incorporation services including modern and flexible corporate laws, our highly-respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations.

Talk about selling your state short. I’ll see their four reasons and raise them one. Thus, the following are my top five reasons to incorporate in Delaware:

1. Flexible Laws. Delaware’s General Corporation Law is the most advanced and flexible business formation statute in the United States. It is designed to provide maximum flexibility in the structuring of business entities and the allocation of rights and duties among founders and shareholders.

2. No Wildcard Juries. If you do end up going to court to settle a dispute, Delaware’s Court of Chancery uses judges instead of juries. I don’t know about you, but I’d rather place my startup company’s legal fate in the hands of a well-trained expert than people whose legal experience consists of The People’s Court and Law and Order re-runs.

3. Precedence = Less Litigation. Since judges are used, decisions are issued as written opinions that your startup company can rely on. Thus, most Delaware corporations do not end up litigating disputes because their professional advisers examine these published opinions and construct deals to avoid lawsuits.

4. It’s Free! (Well, almost). Delaware charges $89 to incorporate. A little bit cheaper than California ($100..but they nail you for $800 every year in franchise fees), New York ($125), and a lot cheaper than Texas ($300). [note: Even if you incorporate in a foreign state like Delaware, your startup company may still be subject to registration as a "foreign entity" and compliance with the laws of states you transact business in.]

5. Privacy. In a world where personal privacy is constantly eroding (the Google 3D Mapping truck should be driving by my house anyday now), Delaware does not require director or officer names to be listed in the formation documents. Thus, Delaware provides a level of anonymity from snoopers.

Even though this post makes a big push for incorporating in Delaware, you shouldn’t assume Delaware is the default choice for your startup company. The fact so many large, public companies choose Delaware should demonstrate that large, public companies tend to benefit the most from incorporating in Delaware.

So think about it and discuss incorporating in Delaware with your co-founders and professional advisers. But note that if you are planning to work with an investment bank or venture capital fund, you will likely have no choice but to become a Delaware entity. And for the five reasons above, that may not be such a bad thing.

A reader emailed me asking: How do I know I have found a great startup lawyer?

And judging by this blog’s most frequent search keywords, you may be asking yourself that question, too.Evaluating your startup lawyer (or any lawyer for that matter) can be a difficult task because a lawyer’s work product tends to be intangible. That is, if you hired someone to build you a bookcase you could test its craftmanship in a matter of seconds. Not the case for the startup lawyer that typically deals in Word and PDF. Therefore, it’s good idea to evaluate your startup lawyer in the following ways to determine if you have found a keeper.

Go Small. Lawyers from small law firms, particularly in the 1-5 lawyer range, tend to make the best startup lawyers. In addition to usually being more cost-effective, small firms tend to understand the mind of the entrepreneur since they are not that far removed from being a startup themselves. Most large firms will of course disagree and attempt to appeal to entrepreneurs by looking 21st century. Typical dog and pony show. Seek an attorney that will truly understand what you are going through as a startup. It’s tough to do that if your office is on the 25th floor and a car service takes you home from work.

Referrals to Other Professionals. A great startup lawyer will suggest you seek the advice of other professionals. Whether the referral is for an accountant, financial planner, banker or even a lawyer in a different specialty, a great lawyer will recognize your non-legal needs in addition your legal needs. Your lawyer should want to help you assemble a professional team as it increases the chances your startup company will succeed. A short-sighted lawyer will try to keep all of your capital earmarked for professional fees with him or her. But the lawyer with a long-term vision for your company would rather you spread your initial professional fees around (even if it means billing less initially) with the thought that your company will then be more likely to succeed.

Prioritizing Your Legal Needs. Finally, a great startup lawyer needs to prioritize your startup company’s legal needs, lay them all out on the table and say something like “these issues HAVE to be addressed now, these issues can wait for now but must be taken care of eventually.” Your startup company will have a number of legal needs and since startup funding tends to be scarce, handling all of them will likely not be feasible initially. A great startup lawyer will rank your legal needs, get the most important issues handled and the navigate you through the rest of the list as your capital allows.

Every now and then you’ll find a business lawsuit that reeks of desperation. I found one.

I guess having a frivolous lawsuit filed against you is a signal that your startup company has “made it.” But I imagine you’d rather find out a different way.

A commercial office space lease is a complicated legal document and is usually your startup company’s first big contract. A real estate broker is a great resource to find available office space and determine the market rents. However, your lease’s location and rent provisions account for about only 10% of the language in a commercial office space lease. The other 90% is not boilerplate language you can simply shrug off. Most of it will undoubtedly contain provisions that can will have financial ramifications for your company.

Why would your real estate broker avoid this other 90%? You have to understand how the commercial real estate game works. The owner of the building hires a real estate broker (”landlord’s rep”) to lease out the office space. When a space is rented, the landlord’s rep receives a fee equal to 6% of the total rent due under the lease. However, if the tenant hired his or her own real estate broker (”tenant’s rep”) this 6% fee is split between them both. Four main points should stick out:

1. The landlord’s rep does not want you to be represented by a real estate broker. If you call the landlord’s rep directly, not only does he or she believe they can take you for more under the lease–he or she will get paid DOUBLE for doing so.

2. The building owner is paying a 6% commission no matter what. You aren’t saving the landlord any money if you don’t hire a tenant rep, so don’t think going solo provides more room to negotiate.

3. Your tenant rep gets paid by the landlord, not you. The great part about tenant rep’s is that they don’t charge you. Thus, you should hire a tenant rep because you will get knowledge about the commercial real estate market without getting a bill.

4. Both the landlord’s rep and your tenant rep get paid only when you sign the lease. This last point is the main reason why real estate broker’s (tenant reps) are so reluctant to negotiate the other 90% of the commercial office space lease. The more you push back on the landlord, the more likely a deal will not be made. They do not want to spend an extra week or two with you to find new space. Your commercial rep would rather you not hire an attorney for the other 90% and just blindly accept it.

Tenant reps do not like working with attorneys and typically refer to us as “deal killers” (although they really mean “commission killers”). Whenever I work with a client on a deal, whether a real estate lease or company acquisition, my only concern is to get it done on favorable terms that protect my client. If I advise my client not to sign an agreement because of a particular provision, I’m not trying to kill the deal. It’s just simply a deal that my client should not enter into.

Thus, if you want the best office space deal possible and avoid being ripped off when you lease office space, you have to hire BOTH a tenant rep and an attorney. That is Step 1.

Part II of this series will focus on the commercial office space provisions that make up the other 90%, why it matters, and what to consider when you negotiate.

New data suggests aging baby boomers are leading the surge in entrepreneurship. In a recent article, the Fortune Small Business unit reports how a recent study found that the number of middle-aged Americans starting their own business is surging.

According to the U.S. Bureau of Labor Statistics, the ranks of the self-employed aged 55 to 65 rose 33 percent in 2006; the number of self-employed 25- to 35-year-olds fell 2 percent.

In a quarterly survey by outplacement firm Challenger Gray & Christmas (challenger-gray.com) of its clients - mostly managers and executives - the number starting firms or turning to self-employment rose 29 percent in the first quarter of 2007 over the first three months of 2006. Of those, a staggering 88 percent were 40 and older.

You can find the U.S. Bureau of Labor Statistics study (in PDF format) here.

Buying into a franchise is one method an entrepreneur might undertake to start his or her own business. Franchises provide the entrepreneur with name-recognition, training and operational support from day one in exchange for an initial franchise fee and continuing franchise royalty payments. While the initial franchise fee is a one-time lump sum payment, the amount of a franchise royalty payment is usually paid monthly or quarterly and can be determined a few different ways.

Percentage of Revenue or Profits. This is the standard way to calculate a royalty. Multiply total revenue by a royalty percentage (typically 2%-10%) every period. Under this method, the royalty fee fluctuates and allows the franchisee to reduce his or her royalty fee expense when sales are slow. Alternatively, this allows the franchisor to collect a larger fee when a franchisee’s sales are great. Sometimes profits are used to determine the royalty fee, but trying to determine “profit” makes using profits unappealing.

Fixed Sum. Increasingly, franchisors are moving towards fixed royalty fee amounts. The benefit of the fixed royalty fee is that both franchisor and franchisee know exactly what the royalty fee will be, allowing both parties to develop more accurate financial forecasts. An additional benefit is that the fixed fee eliminates the need to audit a franchisee’s reported sales. The fixed fee tends to hurt the franchisee when times are bad, as the franchisee will still be responsible for the $X royalty fee when sales are $0. But when times are great, the franchisee will benefit as the royalty fee is essentially capped.

Fixed Sum Based on Square Footage This is a variation of the fixed sum royalty payment and it is determined by thte square footage of the franchisee’s store. Basing the royalty fee on square footage provides the franchisee with incentive to take a smaller space, which can be good if the franchisor wants to maintain a boutique-like atmosphere.