Starting a Business: The 3-Part Series
by Jesse Smith
Part 2: Make it Official
This article is a continuation from part one of our series
Once you have your detailed business plan and your startup costs, you are ready to formalize your company: decide what legal structure your company will have, give it a name, and get a Federal Employer Identification number.
This is an important step for several reasons. Most importantly, if you call around to your potential vendors and distributors using just your personal name and home phone number, you are less likely to have your phone calls returned, and the people who do call you back are likely to tack on hidden service fees. If on the other hand you call around to potential vendors and distributors identifying yourself as a representative of your company, people working for other companies are likely to be more professional in the way they treat you.
Another obvious reason to formally create a company structure is that once your business venture starts showing income – even if it also shows a net loss – you are required by federal law to report that income to the IRS. Depending on the type of company you establish, formally consolidating your company may maintain a layer of separation between your company’s financial status and your own. The legal separation between you as an individual and the company you own as its own entity may be blurred depending on your local laws and particular situation but in some cases adopting a certain business type will help to insulate a business’s owners from lawsuits and bankruptcy proceedings directed against the company. This is one purpose of incorporation: it registers the company with the state as an entity unto itself, independent of its shareholders and employees as individuals. However, the process of establishing an incorporated legal entity may be daunting, and the tax paperwork can be quite complicated. Thus in many situations it is simpler to create a quick and easy sole proprietorship or similar business structure which complies with local laws, allows you to do business under a business name, and can even have employees, but has fewer forms to fill out come filing season.
If you have any employees, or if your business will be formed as either a partnership or a corporation, contact the IRS for an Employer Identification number. You can apply for an EIN online at www.irs.gov or call the IRS toll free at 800-829-4933.
Next, contact your secretary of state’s office for the necessary forms you will need to fill out if you wish to incorporate. This step may not be necessary if you are not operating a corporation; local regulations may vary. In Oregon, the Secretary of State’s Corporation Division has posted all the necessary paperwork, as well as a handy Business Wizard for planning your startup, online at http://www.filinginoregon.com.
There are many types of businesses, the most common general categories being:
A sole proprietorship is owned by one person.
General partnerships, limited partnerships, and limited liability partnerships are all different takes on the theme of multiple people owning a business, with the different names reflecting varying degrees of personal liability.
A corporation is a legal entity with its own responsibilities. Corporations must pay taxes and comply with other rules and regulations, but in many circumstances this business structure will shield its owners from undesirable outcomes. A C-corporation may have an unlimited number of shareholders, and it may be able to show prior years’ losses as a deduction in a profitable year. An S-corporation may only have a small number of shareholders, but it is not taxed as a corporate entity at the federal level; instead the owners are severally responsible for their portion, determined by their stock basis, of the taxes owed on the company’s income as a whole. A non-profit corporation solicits donations, employs volunteers and minimum-wage workers to conduct its day to day operations, and avoids showing a profit by giving any year-end surplus cash to its president, seven vice presidents and the board of directors.
A limited liability company or LLC offers many of the same benefits as an S-corporation, but with no limitation on the number of shareholders who may partner in the company’s ownership. Some restrictions may apply; see your lawyer for details.
A cooperative is owned and operated by members (such as many credit unions), producers (Darigold is a producer-owned dairy), or employees (Full Sail Ale is owned by its employees).
For more information, visit http://business-law.freeadvice.com/business-law/315/ or consult with a legal professional.
This topic is continued in part three of our series
Please note: This information is posted for reference only and is not meant to advise or condone any course of action. We are a design firm, not a law firm. If you have any questions, consult a qualified legal professional. Any actions you make are your own responsibility and Basementia will not be held liable for your mistakes should you make them.