Start Up

“Where do I start to form a business”, I get this question many times from first time business entrepreneurs

My answer will start with “Get competent advice from your lawyer or account”. That’s the disclaimer, I’m not an attorney and I don’t give legal advice. What I can relate is past experience in forming five different corporations (so far) in my life.

First, I’ll point you to this website; http://www.sos.state.mn.us/home/index.asp?page=3
It’s the Secretary of State office for my home state. Go to the “Business Center” and find “Starting a Business”. Now start with something fun, pick a name. There is a free name search available to see if the name you are thinking of for your business is available. Even if you are buying an existing corporation, unless you are making a stock purchase (see later article on asset vs. stock sales), you will need a business name.

Now it starts to get harder. Sole proprietorship, partnership, LLP, LLC, S-Corp or C-Corp. which is best for you. Here is my take on these, again not legal advice;

Sole Prop. – No liability coverage and operation gets tangled with your personal tax return. Can’t figure why anyone would do this!

Partnership – Similar as above, but messier now that you have a partner.

LLP – Limited Liability Partnership – better, but not right yet.

LLC – Limited Liability Corporation - New and improved. Attorneys like this. Would like you to have several LLC’s, but that also means many more tax returns. The difference between LLC and S-Corp could be debated for hours at $400/hr by your attorney. Frankly, the differences are of little consequence to small business owners. I know I’ll get lots of comments from attorneys about that statement. Avoids double taxation.

S-Corp – Subchapter S Corporation - My personal favorite. Limited liability, limited to 30 shareholders (not partners), profits and losses can be allocated amongst shareholders in any fashion and avoids double taxation with profits going to your personal tax return.

C-Corp – Limited liability, but profits taxed first at corporate level and then again when you take dividends. OUCH. Tax issues upon sale of business too. If you are converting a 401k to fund your new business, you’ll need to be a C-Corp.

You have a name; you have a business entity organization structure, now you need a Federal Employer Identification Number (FEIN). This is easy. Call the IRS or go to IRS.com. If you call, they will ask several questions (have your shoe size handy) put you on hold for a couple minutes and then give you your very own FEIN #, yes, that fast!

Next on the list are the Articles of Incorporation. This can be a one pager that is downloaded from the SOS site above, or your attorney can write up a specific volume just for you. Outside of opening a business bank account, I have never needed this document after filing with the state. There are a couple other forms to complete, write a check and sent the pile of documents off to the SOS office. In a week or so you will get back your official certificate from the state verifying that your business is incorporated. This is good information to know even if you are using an attorney. Your attorney will need to ask you several questions to make sure the business entity type is right for you. Being informed helps your attorney protect you. That’s their job, to protect you with sound legal advice. The actual paperwork will be done by their assistant.

The state makes new company registration information available to other businesses, so you will start receiving junk mail almost immediately. Cheers! One of the mailers will be for accounting system software. Think about this because in the next step you will have to know what check type you will need to order. I like QuickBooks laser checks with two stubs. One stub to go with the check as remittance advice, and one to staple to the invoice being paid to complete your record keeping. Simple, fast record keeping is a must.

You’ve got your name, FEIN, and state certificate, so now you need to open a bank account. Bring all these papers with you and ask the banker about small business accounts. Banks have many small business accounts programs that are free. Some offer free checks as well. $100 deposit is OK to open an account. Ask to meet a banker while there. They will be very helpful and might be able to send some customers your way. As you grow, you may need a loan and that process is better if you actually know your banker.

OK, that will keep you busy for awhile. Remember when in doubt, seek competent legal and accounting advice, it’s worth it in the long run.