Hello Work Well friends!
This is the third post in our series, Work Well Blog Series: Starting your own small, service-based business. #startitup
#startitup No.1 / Work Well Blog Series: Starting your own small, service-based business.
#startitup No. 2 / Do your homework. Vetting an idea and planning for the future.
#startitup No. 3 / Signed, sealed and delivered. Forming an official business.
#startitup No. 4 / Get organized. Building a solid foundation. Coming soon!
#startitup No. 5 / Branding basics. Identity essentials. Coming soon!
#startitup No. 6 / Get social. Social Media Planning. Coming soon!
#startitup No. 7 / Clients and customers. Get your audience. Coming soon!
Today's post is entitled #startitup No. 3 / Signed, sealed and delivered. In this post we're going to talk about the necessary items you need to make your business “official” with federal, state, and financial worlds.
What are you? When you start your business, the first thing you have to figure out is what type of entity do you want to operate as. Here's a summary of each as provided by the U.S. Small Business Administration:
Sole Proprietorship - It is an unincorporated business owned and run by one individual - i.e. you - with no distinction between the business and you. When you operate your business actions are your personal actions. That means, you get all profits (money - yay!) and are responsible for all your business’s debts, losses and liabilities (yuck!) Click here for more details, including tax definitions, upsides and downsides.
Limited Liability Company - This is a hybrid type of legal structure that provides the liability shield features of a corporation and the tax efficiencies and operational flexibility of a partnership. The "owners" or "members" can be a single individual (i.e. you), two or more individuals, corporations or other LLCs depending on state definitions. Click here for more details, including tax definitions, upsides and downsides.
Cooperative - This is a business or organization owned by and operated for the benefit of those using its services (typically healthcare, retail, agriculture, cultural, or restauranteur). Some examples include Ace Hardware, the Associated Press, Bob's Red Mill, and REI to name a few. Profits and earnings generated by the cooperative are distributed among the members (or “user-owners”), overseen by an elected board of directors, but regular members have voting influence on the direction of the cooperative. Click here for more details, including tax definitions, upsides and downsides.
Corporation - A corporation, or traditionally called C-corporation, is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. This designation is most appropriate for larger companies with multiple employees, as it's an expensive beast to administrate and operate it from a legal and taxation standpoint. Click here for more details, including tax definitions, upsides and downsides.
Partnership - A partnership is a single business where two or more people share ownership and participate in various elements of the businesses operations, sharing both the profits and losses. There are three types of Partnerships: 1) General Partnerships, who equally share everything; 2) Limited Partnerships, who designate different percentages of liability, participation, etc. - commonly used when investors are involved; or 3) Joint Ventures are when two or more businesses join to achieve a goal - business or territorial expansions or new product development, that could otherwise not be done alone. Typically, Joint Ventures, if successful, convert to one of the other types of partnerships for the long-term duration. Partnerships, just by the name, can be complex simply by the need to document and regulate the relationships between the owners and the business. If you're considering this, I would most definitely lawyer up, as it's best to draft a clear operating agreement that really spells out how everything is going to go down - involvement, profits, changes, etc. Click here for more details, including tax definitions, upsides and downsides.
S-Corporation - This is a corporation that has elected the Subchapter S tax designation from the IRS, meaning that it becomes a unique entity, and with it, thus altering - and reducing - some of the liabilities associated with financial and operational aspects. What's unique about an S-Corp is that the profits and losses pass through the owner's personal tax returns, instead of the business. There are stipulations though, that require the shareholders to pay themselves “reasonable compensation.” In addition to that compensation, some owners opt to obtain distributions directly from the company (derived from the company's profits), and use company funds to opt to pay the personal taxes on those distributions. Preferred salary to distribution ratios apply, methods on pro-actively paying taxes on distributions, etc. all come in to play, so it's best to consult your CPA. Click here for more details, including tax definitions, upsides and downsides.
If there's any ever question as to what's the best route for you to go, consult an attorney. They can give you the rundown on the entity that applies best to you.
What's in a name? So, you've decided on a structure. Now, you'll want to pick a name for your new business. The great thing is, the name of the company does not have to be the name in which you operate as. You could name your company, “Awesome Company, LLC,” but file a Doing-Business-As (or DBA) document, and operate as the desired name, “Cupcaketeria.” It's all paperwork.
To file the entity name, go to the Secretary of State's website of the state you will be filing in and do a name search to see if it's available. (Each state has some helpful guidelines as to naming your business, which you should pay attention to.) From there, you can opt to go it alone and file the documents yourself through the Secretary of State (each state varies on methodology) for a nominal fee between $40-$60 usually. You could also hire an attorney to do it for you or a third-party - like Inc.file - both for an additional fee. It takes typically 1-3 weeks for turnaround, and can be expedited for an additional fee on top of that. Once you've received confirmation of your company's filing, you'll need to look into the following:
Stately accounts? Check with your State's guidelines to determine if you will need a Sales Tax Account (for taxed goods), Unemployment Insurance Account or Wage Withholding Account. Note, both the Unemployment Insurance Account or Wage Withholding Account are typically required once you have non-owner employees, so check with your state or attorney for requirement details and forms for application.
To FEIN or not to FEIN? In case you didn't know, an FEIN, or Federal Tax Identification Number, is a unique identity code - like a social security number - just for your business. You may or may not need one. Click here to determine if that's the case. Just as an FYI, I've applied for one despite the fact that it's not required. As a sole-proprietor of an LLC, I can just use my Social Security Number, but honestly, I'm a bit weary to have it float around every time I complete an I-9 for a new contract. Here's why.
Do you have a license for that? Certain types of businesses need to be licensed through that State's Department of Regulatory agency. Check with your State for details.
Time for the pseudonym? Get back on the your state's SOS website and find the Statement of Trade Name form for your DBA. These can typically be filed for a minimal fee ($15-$30.) Don't waste this one on an attorney or third party, it's a piece of cake.
Get banked. So, you're all named, filed, numbered, licensed and registered as necessary. It's time to set-up a bank account to keep everything clean and tidy - and essential if operating as an LLC, cooperative, partnership, corporation, or S-Corporation to protect your personal assets. Check out your surrounding business bankers and examine what's out there. Be sure to ask about transaction limitations, monthly fees, and conditions for opening a business account. I ended up going with a local bank, as these fees were minimal to non-existent, the customer service was awesome, and they were really close to my home. Bring along your filed documents (Articles of Incorporation, typically), your FEIN (if using), your driver's license, and some money to make a celebratory deposit to open the account. My bank didn't require a specific opening balance, but I chose an amount to open the account and pay for the business checks I ordered. I also opted for a debit card, but asked them to limit my daily transactions to $500 for withdrawals. I can always call to override, but for the time being, I wasn't planning on making any big purchases and wanted to make sure that if my card was stolen, no one else could either.
Well folks, there you have it. Those tedious administration items associated with forming and filing a business all wrapped up to help you get on your way. Hopefully this was helpful, and remember, I am merely a tour guide bringing awareness to elements required to date for the formation of my business, and those I've worked with to date. It never hurts to verify with an attorney and CPA to be double sure any additional items specific to your state may apply.
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As with all Work Well posts, their intent is to help start a conversation and point you in the right direction. If you require any additional help, have feedback or just want to connect - feel free to comment on a post or contact me. Let's get a conversation going.
Work well, be well my friends -