Note from Jimmy Hua: Another article about incorporating an company.
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5 Steps To Legally Forming Or Incorporating Your First Business
Posted by Michael Costigan, on October 18th, 2010
First I must make a disclaimer, I am neither a business lawyer, nor do I hold any professional qualifications in business law. This article is written merely on my experience and understandings after having co-founded a Limited Liability Company (LLC) and an incorporated business (Inc.).
Starting your own business is without a doubt one of the most exhilarating undertakings you will ever make. The work and dedication you pour into your business will truly be the make or break of it. Making the right decisions in the planning phase of your soon to be business is essential, and by taking the time to get organized and fully understand what it is that you’re getting yourself into, you’ll be better prepared to face challenges and obstacles as they present themselves. You will also know better what to expect from studying others’ experience. I highly recommend you find a mentor before you get going, and then additional ones once you’re up and off the ground. The topics covered below, although at a high-level, are intended to provide anyone with an entrepreneurial dream, the fundamental knowledge they will need to get going.
1. First things first – how serious are you?
Many people dream of owning their own business because they see the perks that come with the reality of owning a successful business. Things like being able to control their own work hours, working from anywhere, being able to take vacations at any time, and not to mention of course, increased levels of income. But you should be warned, none of these are characteristics of the start up life, in fact pretty much the opposite of each one of these is true when starting your own business. If you’re serious about this undertaking, and you have the support, be it financial means or family wishes, you’re ready to take off on one of the most intense roller coasters you’ll ever ride.
2. Obtain any licenses or permits you will need for your business.
Running an honest business with integrity isn’t possible without meeting the proper legal requirements. Depending on the type of business you are planning on starting up, the required permits and licenses will vary greatly — from the most basic business permit allowing you to offer a professional service (such as graphic design), to more complex requirements for licenses permitting the sale of certain goods and or licenses required to operate corporate fleets of vehicles, just to name a couple. There are hundreds of licenses, and it is strongly advised that if this business is more than a simple service based business, or small retail business (where you would only need a few licenses for the retail location), that you invest in a business lawyer to aid you in the start-up process.
Often times business licenses and related permits are obtained through your local City Hall or County Clerks office. Check your local governing body’s website for the information and forms you will need. Most cities offer help kits for people looking to start their own small businesses. Another great resource is the U.S. Government’s Small Business Administration which can be accessed at SBA.gov.
3. Open a business bank account in the company name or your own.
You will want to keep business and personal funds separate from the beginning, this helps simply your finances and has a number of other benefits as well. First of all your business checking account will come with a business debit card and checks, if you have a line of credit you decide to take out, you will also have a business credit card. Having this separate account should seem like a no-brainer, as it will be much better for corporate transactions and record keeping purposes, which you higher a personal accountant, or whether you’re the type who likes to keep everything going in QuickBooks and being able to file your taxes like a pro. At this point it should also be obvious that as you begin to build a paper trail, proper organization, record keeping, and a secure and suitable system for file storage is essential. This should include a way of storing both physical and digital copies of all important documents. It is in your best interest to have copies of everything, and digital scans of anything really important in case documents are lost or misplaced as they often are in the chaos of startups.
4. If operating under a name other than your own, file for a DBA.
A DBA is a ‘doing business as statement’. These are also often referred to as ‘fictitious business name statements’. If you plan on operating your business under a name other than your own, or operating under a different name than a parent company or the original filing of a corporation, you will need to register one of these with your County Clerk’s office. Failure to do so could catch up with you later, and is also illegal because it is seen as misrepresentation of business. So if John Doe wants to start a company called “Dynamic Rollerblades Inc.”, he will need a DBA. The fees for these aren’t very much and can range anywhere from $25 dollars to $150 dollars. Essentially what you’re doing is creating a publicly published record saying you will be operating under the given name. This is usually published in a few local newspapers, and you usually receive a clipping for proof that your DBA has been filed.
Note: Employers will also have to have an Employer Identification Number (EIN) and this is obtained through the IRS. For more information on these please visit www.Nolo.comEmployers are defined as such by having actual individuals on payroll rather than a freelance or independent contractor basis.
5. If incorporating, choose a suitable ownership structure.
For the sake of brevity, we will just outline the major forms of ownership within businesses.
-Sole Proprietorship/Partnership: This is the simplest form and works for many people. This is a one person, or two person business that is inseparable from its owners. Income and loses, as well as taxes, are all reported on personal tax returns. The owner is personally liable for business related obligations and debts or court judgments.
-Limited Liability Company (LLC): While forming a LLC is more costly, it is will worth it, especially if you have a team of co-founders. An LLC limits the owner’s personal liability for any business debts incurred for judgments against the company. A corporation is different from a sole proprietorship in that it is separate from the people who own and control it. You do not use your personal tax returns for an LLC. The corporation pays taxes on its corporate tax returns. An LLC is governed by the Articles of its Incorporation and owners are members on the LLC with a certain amount of shares (voting or non-voting, if set up in this manner). These agreements are all formulated within a standard Operating Agreement between all members. LLC’s must pay a minimum tax to the state Franchise Tax Board each year.
-Corporation: Similar to a LLC, there are both C and S corporations which are taxed differently. S corporations file Form 2553 which enables them to be tarted and taxed like a partnership or LLC. Corporations must follow a strict method of governance, record keeping, and organization policies in order to retain limited personal liability.
Additionally there are limited partnerships, nonprofit corporations, and cooperatives which have additional legal configurations and require more space to adequately explain. Starting a non-profit is a bit more of an invasive process.
Hopefully this helped you in getting some basic strategy down for your start up goals. Good luck, see you in the business world!
Michael Costigan speaks to teens and adults about effective communication so that they may make better informed decisions together. Read more about Michael here.