If you’re starting a new business you’ve probably looked into or at least thought about setting up a separate entity to operate your business under. While there are a lot of considerations that go into starting a business, if you’re just getting started, here are a few things to consider which could save you time, hassle and money down the road.
What Type of Entity & How Will You Be Taxed
Usually, when someone is looking to start a business a major consideration is how to get limited liability and protect personal assets from the liabilities of the business. The main entities used to do this are corporations and LLC’s. The type of entity you choose will determine what type of paperwork you need to file with the state for formation, how much the fee for filing is and what type of maintenance or reporting requirements you will have to abide by to keep the business in good standing. Generally, LLC’s have less of a filing fee and require less in terms of annual reporting.
Once you determine what type of entity you will form, it’s wise to think about how the company will handle taxes. LLC’s provide a variety of options: they can be a pass-through entity, where all the business income is passed to the individual owners who pay income taxes at the individual level; you can opt to be taxed as a subchapter S corporation; or you can choose to be taxed as a subchapter C corporation. If you form a corporation you can look into being taxed as a subchapter S corporation or a subchapter C corporation. What type of tax option you choose will probably depend heavily on your specific financial setup and situation and business owners should seek the advice of an accountant to determine what works best for them.
Business Name
The general guidelines for business names are that the name must be different from any other business registered in your state and that it must include some form of “Corporation”, “Inc”., “LLC”, etc. to designate it as a separate business entity. Most states have a search tool online where you can check the availability of the name.
One additional consideration is to check with the United States Patent and Trademark Office (uspto.gov) to see if the name you want is already registered as a trademark. It’s better to know upfront than find out after you’ve spent time and money on branding your business.
Ownership Percentages
If you’re a solo business owner this is easy, you own 100% of the company. If there are multiple owners this becomes a much bigger consideration and one you’ll want to get straight at the beginning before any issues arise. With LLC’s you’re talking about what percentage of 100% each owner will have and what percentage will be required to authorize company decisions. With a corporation you’ll need to determine how many shares to authorize, how many each owner will get, and how many will be required to authorize company decisions. Make sure to get it in writing who owns what, and have some sort of plan for how you’ll handle a situation where an owner wants out, or needs to be removed.
Additional Formalities
There are a couple of other things you’ll need to get setup in order to get your business off the ground and moving. Make sure to get an Employer Identification Number from the IRS (Apply For EIN). You’re also going to need a separate bank account in the name of your business, which needs to be kept completely separate from any of your personal bank accounts. Finally, make sure to check on getting a business license. Those requirements will vary by city and county, so check your specific location in order to determine how to handle that.
Special Licenses
Certain types of businesses will require special licenses in order to operate. While the process for getting some of these may be a burden, if you fail to do so you’re going to be looking at fines or potentially being put out of business. A few examples are businesses that work with alcohol may require a liquor license, or a business that provides barber/cosmetology services may require certain business and individual licenses in order to operate legally.
Have questions about the requirements to get a business up and running, or other legal risk concerns and questions? Contact us for a free legal consultation.