What Does It Take to Start a Business?
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As a San Diego North County business attorney, I am frequently asked: “What does it take to start a business?” Generally, there are six steps to take into account when starting a business:
1. DECIDE ON A LOCATION FOR YOUR BUSINESS
When deciding on a location for your business, certain factors need to be taken into consideration such as liabilities, taxes, incorporation costs and fees; where you want to do business; foreign entity doing business; raising capital; and reporting requirements. The decision to incorporate the entity in another state should only be made after weighing the advantages against the disadvantages. These factors should be discussed with your business attorney before you decide on a location for your business.
2. DETERMINE THE APPROPRIATE BUSINESS STRUCTURE
There are several business structures that are used in setting up a business. Here are some of the most common entities used, their requirements and liability issues:
Sole Proprietorship is a business owned and operated by an individual. Sole proprietorships are the basic forms of business organizations, which require no formal type of government filings to form the business and are not required to follow any type of operating formalities. The benefit of a sole proprietorship is the taxability of business income and the deductibility of business losses on the business owner’s individual tax returns. The liability of a sole proprietorship is that the business owner is personally liable for all liabilities and obligations of the business, which liability extends, not only to liabilities in excess of the amounts invested in the business including any insurance coverage, but also to the business owner’s personal assets.
General Partnership is an association of two or more persons to carry on a business. A general partnership is another type of business entity which is easy to form but requires a written partnership agreement to govern the operations of the partnership and the relationship among the partners. Compliance requirements for a partnership are minimal and require that a Statement of Information be filed with the State of incorporation and the partnership maintains records to provide to the partners. The liability of a general partnership is that a partner’s liability not only extends to that partner’s percentage interest in the business but also to the partner’s personal assets as well.
Limited Partnership is a partnership formed by two or more persons that has one or more general partners and one or more limited partners as co-owners of a business. A written partnership agreement should be established between the business and its partners and a written partnership agreement should also be established between the partners themselves establishing the classes of general or limited partners. Compliance requirements for a limited partnership require more formal filings with the State, such as, filing a Certificate of Limited Partnership and obtaining an agent for service of process. The liability of a limited partnership is that the general partner is personally liable for the partnership’s debts, obligations and liabilities. However, the limited partnership allows limited partners to avoid subjecting their personal assets outside of their investment. A limited partner is granted limited liability as long as the partner does not participate in the control of the partnership business.
Limited Liability Company is an entity having one or more members, organized under State statute. Limited liability companies have all the powers of natural people, which include the ability to transact business, sue or be sued, make contracts, own and transfer real estate, and issue stock subject to limitations. Compliance requirements for a limited liability company require more formality in formation and operation, such as, filing Articles with the State, filing a Statement of Information with the State, obtain an agent for service of process, and establish an operating agreement. The liability of a limited liability company is limited for all its members, managers and officers. As long as the State’s statutory requirements are followed, the members, managers and officers of the business are not personally held liable for any debt, liability or obligations of the business arising in contact, tort or otherwise solely by being a member, manager or officer of the business.
Corporation (commonly known as a C or regular corporation), is by far is the most common and well known form of business entity. All corporations are governed by the State of incorporation and are treated as separate and distinct legal entities separate from its owners with all the rights to own property, make contracts and sue in its own name. Compliance requirements for a corporation require strict statutory compliance, such as, filing the Articles of Incorporation with the State, filing a Statement of Information with the State, obtaining an agent for service of process, establishing bylaws, issuance of stock, establishing a board of directors, appointment of officers, holding annual shareholder meetings, holding annual director meetings, and maintaining books and records of written minutes. The liability of a corporation is limited for all its shareholders and the shareholder’s personal liability is limited to the investment. As long as the State’s statutory requirements are followed, the shareholders, directors and officers of the business are not personally held liable for any debt, liability or obligations of the business arising in contact, tort or otherwise.
Subchapter S Corporation (commonly known as an S corporation), is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code and is treated as a partnership for most tax purposes. The income of the S corporation is passed through to its shareholders therefore avoiding double taxation. Other than the different tax treatment, the S corporation operates identically to that of a C or regular corporation. Compliance requirements for an S corporation are identical to that of a C or regular corporation, however, for a corporation to qualify as an S corporation certain requirements must be met. The liability of an S corporation is identical to that of a C or regular corporation.
3. FILE YOUR TAX AND EMPLOYER IDENTIFICATION DOCUMENTS
Like any individual, an incorporated entity must have its own social security number. This number is called the Employer Identification Number (EIN). This number will allow the incorporated entity to act as a sole and separate entity and allow it to pay taxes and open bank accounts. This number may be obtained through your business attorney or going online to the IRS web site.
4. OBTAIN THE NECESSARY PERMITS, LICENSES AND REGISTRATIONS
Some of these permits, licenses, and registrations may include:
Patent and trademark protection
Securities and Exchange Commission (SEC) filing
File as a foreign entity
Annual state or states filing
Specific licenses to conduct certain types of businesses
5. CREATE A BUSINESS PLAN
It has been said that the most important step in running a business is the creation of your business plan. A business plan is a detailed description of your business which allows you and others to evaluate your business. Business plans generally include the following:
Overview of your business
Description of your product or services
Sales plans and forecasts for your business
Marketing and advertising strategies for your business
Who is your competition?
As a San Diego North County business attorney, I am frequently asked: “What does it take to start a business?” Generally, there are six steps to take into account when starting a business: 1. DECIDE ON A LOCATION FOR YOUR BUSINESS When deciding on a location for your business, certain factors need to be taken…