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 consider when starting a business:
1. DECIDE A LOCATION FOR YOUR BUSINESS
When deciding on a location for your business, certain factors must be taken into account, such as responsibilities, taxes, costs and incorporation fees; where you want to do business; foreign entity doing business; raising capital; and reporting requirements. The decision to incorporate the entity into another state should only be made after weighing the advantages against the disadvantages. These factors should be discussed with your business attorney before deciding on a location for your business.
2. DETERMINE THE APPROPRIATE BUSINESS STRUCTURE
There are several business structures that are used to establish a business. Here are some of the more common entities used, their requirements, and liability issues:
Sole proprietorship is a business that is owned and operated by an individual. Sole proprietorships are the basic forms of business organizations, which do not require any kind of formal government filing to form the business and are not required to follow any kind of operational formalities. The benefit of a sole proprietorship is business income taxation and business loss deductibility on the business owner’s individual tax returns. The liability of a sole proprietorship is that the owner of the business is personally liable for all liabilities and obligations of the business, which liability extends not only to liabilities that exceed amounts invested in the business, including any insurance coverage, but also to the business owner’s personal property.
General partnership is an association of two or more persons to carry on a business. A general partnership is another type of business entity that is easy to form but requires a written partnership agreement to govern the operations of the partnership and the relationship between the partners. The compliance requirements for a partnership are minimal and require that an Information Statement be filed with the State of Incorporation and that the partnership maintain records to provide to partners. The liability of a general partnership is that a partner’s liability extends not only to that partner’s percentage interest in the business, but also to the partner’s personal assets.
Limited partnership is a partnership of 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 must be established between the company and its partners and a written partnership agreement must also be established between the partners themselves establishing the classes of general or limited partners. The compliance requirements for a limited partnership require more formal filings with the State, such as filing a Limited Partnership Certificate and obtaining an agent to service the process. The liability of a limited partnership is that the general partner is personally liable for the debts, obligations and liabilities of the partnership. 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 controlling the business of the partnership.
Limited Liability Company is an entity that has one or more members, organized under state statute. Limited liability companies have all the powers of natural persons, including the ability to transact business, sue or be sued, enter into contracts, own and transfer real estate, and issue shares 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 an Information Statement with the State, obtaining an agent for service of process, and establishing a operating agreement. The liability of a limited liability company is limited to all its members, managers and officers. Provided State statutory requirements are met, Company members, managers, and officers are not personally liable for any debt, liability, or obligation of the Company arising out of contact, tort, or otherwise solely by virtue of being a member, manager, or official. of the business.
The corporation (commonly known as a C or regular corporation) is by far the most common and well-known form of business entity. All corporations are governed by the State of incorporation and are treated as legal entities separate and distinct from their owners with all rights to own property, make contracts and sue in their own name. Compliance requirements for a corporation require strict adherence to laws, such as filing Articles of Incorporation with the State, filing an Information Statement with the State, obtaining an agent to service process, establishing bylaws, issuing shares, establishing a board of directors, appointing officers, holding annual meetings of shareholders, holding annual meetings of directors, and keeping books and records of written minutes. The liability of a corporation is limited to all of its shareholders and the personal liability of the shareholder is limited to the investment. Provided State legal requirements are met, the shareholders, directors and officers of the company are not personally liable for any debt, liability or obligation of the company arising in contact, tort or otherwise.
Subchapter S Corporation (commonly known as an S corporation), is a corporation that has elected to pay taxes 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 on to its shareholders, so double taxation is avoided. Aside from the different tax treatment, the S corporation operates identically to that of a regular or C corporation. The compliance requirements for an S corporation are identical to those for a regular or C corporation, however, in order 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 regular or C corporation.
3. SUBMIT YOUR TAX AND EMPLOYER IDENTIFICATION DOCUMENTS
Like any individual, an incorporated entity must have its own social security number. This number is called an Employer Identification Number (EIN). This number will allow the incorporated entity to act as a single, separate entity and allow it to pay taxes and open bank accounts. This number can be obtained from your business attorney or by going online to the IRS website.
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) Presentation
Present yourself as a foreign entity
county filing
Annual filing of state(s)
Specific licenses to conduct certain types of business
5. CREATE A BUSINESS PLAN
It has been said that the most important step in running a business is creating your business plan. A business plan is a detailed description of your business that 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
financial information
Who is your competition?
6. MEET ANNUAL REPORTING REQUIREMENTS
Your company will be required to file annual reports in the state of incorporation and in any state in which the company has qualified to do business, as well as at the federal level, such as the IRS and/or the SEC.