Business Formation: Starting a New Business
When beginning a business, you must first determine what type of corporate formation best meets your needs. While there are many options, each serving a different purpose, it is vital to determine how your entity selection fits your business plan, partnership, ownership structure and so forth.
One of the reasons a business attorney is so important to your business, is that s/he can help determine the proper entity choice for you. A business lawyer may have worked with dozens of other business owners and prospective business owners such as yourself, providing a depth of experience you wouldn’t otherwise have available to you.
The most common types of business entities in the U.S. are:
- Sole Proprietorship
- General Partnership
- Limited Liability Company (LLC)
Unlike other forms of business, a sole proprietorship is not considered a separate legal entity. This means that whether you’re functioning under your own identity or an alias (e.g., Rob’s Roller Rink), you are solely responsible for the business’s debts and liabilities. This can be a drawback if your business fails, since creditor will be coming after you and your assets for payment.
While a sole proprietorship does not offer liability protection, this business entity type may be a popular choice simply because there are not formalities involved to set up a sole proprietorship. Basically all you do is start doing business without forming any other type of business entity and you are most likely a sole proprietorship.
A partnership is created when two or more individuals combine their efforts to create and run a business enterprise for profit. While most partnerships don’t offer the same type of protection as a corporation or limited liability company, certain partnerships such as limited partnerships and limited liability partnerships may provide some liability protection for certain partners. Setting up a partnership can range from simple to complex. Properly drafted partnership agreements give the partnership stability and flexibility.
Limited Liability Company (LLC)
While Limited Liability Companies are still relatively new to the U.S. (most laws allowing LLCs were passed in the 1980s-1990s), they have become a very popular business entity. LLCs combine the liability protection of a corporation with a partnership’s tax treatment and ease of operation.
LLCs are far easier to operate than corporations with the ability to bypass certain corporate formalities, making it an ideal choice for smaller businesses that don’t need the regulatory headaches. One of the best features of the LLC is the ability to create rules and regulations that work for the business and its owners. For example, an LLC might choose to have officers and a president, maybe a board of directors, or it might choose to implement a system without the traditional corporate hierarchy. Flexible, when used right, can make the LLC experience easy and rewarding.
Corporations have been around for a long time and are treated by the law as a separate legal entity. Corporations can enter into contracts, be taxed, purchase property and even commit crimes. Corporations are regulated on a state-by-state basis. While there may be nuances state to state, the structure of a corporation is rigid and includes a board of directors, officers and shareholders. Regular meetings and minutes of those meetings are required by law. Failure to follow your state’s rules can result in the corporation being dissolved and might also lead to personal liability for corporate liabilities. Corporations have potential draw backs when it comes to taxation, but this is something you should discuss with your business attorney.
Your Business To-Do List
Here’s a short list of things to do to launch your business:
- Create a business plan: A business plan should help you define your objectives and shed light on areas of concern. If you want to bring in six figures each year, your business plan can help you understand how many widgets you need to build and sell to make that happen.
- Obtaining loans: Cash-flow is the lifeblood of a business. It doesn’t matter how much money you make at the end of year if you can’t pay your monthly bills as they come due (rent, supplies, raw materials, salaries, marketing, etc.). Borrowing money can be an effective way to smooth out seasonal revenue or to survive the first months of a startup when revenue is slowly growing.
- Get an EIN: An Employer Identification Number (EIN) is solely for tax administration purposes. You can visit www.IRS.gov to learn more about obtaining your EIN.
- Comply with state licensing requirements: There are state and federal laws with which your business must comply. You can find licensing and permits for your business at www.SBA.gov/licenses-and-permits, or check with your state’s Secretary of State office.
- Open a bank account for your business: It’s a good idea to keep your personal accounts and business accounts separate. If you commingle personal and business funds, you raise red flags for taxes, partnership conflict may develop and liability protection can be destroyed.
- Lease office space: Leasing space for your business can be a tedious task. See what is available in your area by doing some online searches for office space. Once you have a sense for the market, you can talk to commercial real estate agents who can give you suggestions and show you properties that might not be found online.
- Set up your virtual office or online store: Perhaps you don’t need a physical office or storefront, opting instead for a virtual office or online store. E-commerce can be very lucrative, but it also can be costly to set up, maintain and improve. Check with your business attorney for taxes, licensing or other regulations that might apply to your online business.