Start a Business – What Type of Company Should You Form?
Monday, May 31st, 2010Choose An Entity Type
When you initially form a new company, you need to consider what type of legal entity to utilize. Here are some of the most common examples:
- LLC – Limited liability companies are some of the easiest to setup and maintain, and are pass-through entities. This means that the profit and loss from the business passes through to the individual owners on their personal tax returns. LLCs can be good for owning assets such as real estate because of protections they offer with “charging orders”.
- S-Corporation – An S-corporation has many of the tax benefits of a C-corporation, but has passthrough taxation. This means that the profit and loss from the business passes through to the individual owners on their personal tax returns. You can elect S-corporation status by filing a simple document with the IRS after forming a corporation in your state.
- C-Corporation – A C-corporation is the entity structure of companies publicly traded on the stock exchange. It provides the maximum amount of deductions for fringe benefits, and a low corporate tax rate for a small corporation. However, it is the hardest to set up and maintain, and also has doubletaxation. Double taxation means that the earnings are taxed at the corporate level first, and then on the individual tax returns of the stockholders.
- General Partnership – This is a partnership between multiple owners, but all partners equally share in the liability, ownership, and profits.
- Limited Liability Partnership – This is a partnership between multiple owners that offers the ability for some partners to have limited liability, as well as limited input on management decisions.
- Sole Proprietor – This is where you just operate in your own name, or you personally do business as (DBA) another name that has not been officially formed as one of the other entity types (and thus it is just you using an alias). Many people think that by registering a DBA certificate with their local county office gives them a legal entity structure, but it does not. It is just an assumed name for your sole proprietorship. (Note that corporations and other entities can file DBA’s with their Secretary of State, but that is different than what is meant here).
Each of these entity types have their pros and cons. Think long and hard before operating as a sole proprietor. The reason is because a sole proprietorship subjects you to complete personal liability. This means that if your business is sued, your house, your car, your personal savings, and pretty much everything else are at risk. Consider forming an entity that provides an additional level of protection for your personal assets.
Note that each state has different laws on entity types, and you should determine what your options are for the state in which you plan to form your company. Consult an attorney if your questions are not answered from your own research.
You can find out what entity structures are available by visiting the Secretary of State (SOS) web site for the state in which you plan to form the company. We have spent a lot of effort creating an index for you of all of the Secretary of State web sites across America (on our site below). Before proceeding to the next step, check out your respective SOS web site to research what type of legal structure may be best for your type of business.
Brainstorm Entity Names
Once you have determined the legal entity type to use, brainstorm on some names for your company. Write down 3-5 names now. In a later step, we will illustrate how to pick the best name.
- Search Secretary of State – Search to see if your name is available on the Secretary of State web site for your company’s home state. If no, you need to cross that name off of your list. The reason is because the SOS will not let you form a company with that name, regardless of whether the existing company is in your industry or not. In other words, that name is taken, and cannot be registered again in that state.
- Search United States Patent & Trademark Office – Search to see if anyone else has a trademark registered with the USPTO that is identical or similar to your name. If so, is it a really famous brand, or are they in a similar industry such that your customers may also be their customers for similar products? If yes to either question, then you should cross that name off your list to err on the side of caution. If not, proceed with step 3 to do further research on the current name.
- Search State Trademark Register – Does anyone else have a trademark registered with the Trademark Register for the state in which you plan to form the company? Each state maintains a trademark register for businesses who have registered that name in the state. You should repeat step 2, but for your state.
- Search The Search Engines – You should search one or more search engines such as Google, MSN, and Yahoo to see if anyone in your industry is already using the name.
Form the Legal Entity
Now that you have chosen the type of legal entity, and have determined what name to use for your company, it is time to file the papers with the Secretary of State of the state in which you plan to organize the company. Note that the state in which you form the
company does not have to be the same state in which you live. Some states have more corporate friendly laws than others. However, such an explanation is beyond the scope of this blueprint.
You have several options for getting the company formed. You can hire an attorney, fill out the paperwork yourself from the SOS web site, or hire another third party service such as American Incorporators. to file the papers for you. There are many other companies, such as Socrates Media and Legal Zoom who sell forms to help you do the formation yourself.
Obtain an EIN from the Internal Revenue Service
As soon as you get confirmation from your state SOS that the company has been officially formed, you should obtain an Employer Identification number from the IRS. Sign up for an EIN on the IRS web site, or by calling the EIN department at: (800) 829-4933.
An EIN is a social security number for a business. You will need it to open bank accounts, file taxes, etc.
Obtain Other Required Licenses
You also need to make sure you have any required licenses by your state for the type of business you are operating. For example, some types of businesses must have a license before operating, such as attorneys, insurance agents, restaurants, daycares, etc. Your county government office can point you in the right direction if you are not sure.
Create the Company Record Book
It is now time to set up the company record book.
The easiest way to get your company record book created and organized is to buy one from a service such as Legal Zoom or Socrates Media. The “corporate kits” typically have a nice binder, sample forms, folders for storing the various types of documents that you should be keeping, stock certificates printed with your company name (if applicable), and so on. You will need to maintain company records over a period of time, so take the time to organize them up front. You will be glad you did.
Document Future Deadlines
In the world of entrepreneurship, you have a lot of deadlines to keep track of in order to keep the various government agencies off your back. Estimated quarterly income taxes, annual or bi-annual operating statements with your state SOS, sales tax filings, employment filings, company tax returns (in addition to your personal tax returns), etc.
Business owners typically have to file estimated quarterly taxes with both the IRS and the home state. In other words, you will need to make income tax payments throughout the year to avoid being penalized if you did not pay in enough at the end of the year. It is not enough for you to catch it up at the end of the year. They can actually penalize you for not paying it in more even installments. You can find links for the Departments of Revenue for all 50 states and the IRS on our Innoventum web site.
If you found this article helpful and would like to learn more about how to start a business, you can download the remaining 9 articles of the “Business 2.0 Blueprint” at http://www.innoventum.com The “Business 2.0 Blueprint” is a FREE 60-page interactive article with graphics that serves as a step-by-step guide on starting and operating a business. It was written by two attorneys and is recommended by over a dozen government agencies.
Denise Gosnell and Jynell Berkshire are both attorneys and the co-founders of Innoventum, Inc. Frustrated by the lack of free and affordable resources for business owners and people looking to start and grow businesses, Innoventum was founded in 2007 with the mission of creating the best business startup and growth products and services on the planet earth.