Business Formation

Legal Help
Although entrepreneurs by definition do much of the start-up work themselves, it often helps to have an experienced attorney to help you start your business. An attorney can help you pick which type of legal structure is best for your business, and make sure that you have all of your forms and paperwork to form the correct legal structure. FindLaw's Business Formation Legal Help section provides information to help you determine if you should hire an attorney to help you with the tasks involved in starting a business. In this section, you can also find information and resources to help you find a small business attorney, as well as some sources for low-cost legal help.

When starting a business, it is important to make sure you do everything by the book. Failure to file the right taxes or obtain the applicable permits can have negative consequences not only on your business but also possibly on your personal life. Choosing the wrong business structure, or incorrectly filing the paperwork for the structure you choose, could leave you unintentionally open to personal liability for your business's debts.
Although it is an added expense, an attorney can be a helpful asset to a person who is starting a business. Attorneys are familiar with the laws that will pertain to businesses in your location and industry. Attorneys can make sure all your business affairs are in order and can help you with a variety of business tasks. For example, an attorney can help you draft contracts with vendors and customers that you can use as the basis for future contracts. An attorney can also assist you in establishing hiring and firing practices and policies that can help shield you from lawsuits in the future. An attorney can also draft any partnership agreements, government registration documents, and tax forms to get your business started. Finally, an attorney will help you determine and obtain all of the permits and licenses required for your business.
Although an attorney can be very helpful in starting a new business, sometimes there just isn't enough money for you to spend on one. In that case, there are some low-cost options for handling the legal aspects of your business. One simple, low-cost option is using do-it-yourself legal forms. These forms must usually be purchased, but are usually not very expensive. If you want to make sure your forms are all correct and in order, you can have an attorney review the forms, which would save considerable costs when compared to having an attorney draft the legal documents him or herself.
There are also some legal resources that are free. The U.S. Small Business Administration (SBA), for example, provides helpful and free information on all aspects of a business, including starting and managing a business. You can always also use the Internet to research the legal topics or issues. This research can help you determine if it's something you can take care of on your own, or if it would be a good idea contact an attorney.
Choosing a Legal Structure
One of the most important choices you will make when forming your new business is which legal structure to choose from. Also called a business ownership structure or business form, choices include LLCs, partnerships, sole proprietorships, corporations, non-profits, and co-operatives. The type of business entity you choose will depend on several factors such as liability, taxation and record keeping; but the key is to find the best fit for your organization. The following resources will help you decide which legal structure is best for your business by examining the pros and cons of each, relevant investor issues and more.
No business owner wants to be personally liable for business debts or pay out-of-pocket for a judgment against the organization. How you structure your business at the outset will significantly impact your personal exposure to liability. There are a number of business entities available to help shield you such as forming a corporation, limited-liability company (LLC), limited-liability partnership (LLP) or limited partnerships (LP). Consider avoiding the sole proprietorship model if you want maximum asset protection.
When you begin weighing the pros and cons of each business form, the sheer volume of information coming at you can seem overwhelming. The most important thing to consider is making sure your particular business model qualifies for your proposed business structure. For example, if you are attempting to form an S-corporation you can only have a limited number of shareholders. Also consider what regulations you will have to follow depending on the structure you choose.
Creating a limited liability company (LLC) requires you to take several important steps depending on your state. You'll need to first files Articles of Incorporation with the Secretary of State. All members of your LLC should enter into an operating agreement, setting forth the rights and rules of the newly formed company. In some instances, the LLC will also need to apply for a tax identification number.
Making the decision to start your own business is a huge endeavor. Tax planning and preparation is key to minimizing tax liability for your small business. Be sure to research U.S. tax codes, in addition to paying attention to changing tax laws each year. How you choose to structure your business at the outset can have lasting implications into the future and affect your profit margin.
Choosing a legal entity for your business takes research and effort to ensure you are complying with the laws. You may want to hire a business attorney to assist you with the more challenging aspects of small business formation such drafting and filing documents and complying with local laws. Whether you find yourself grappling with a business debt liability issue, or just need some guidance on whether to go with a sole proprietorship, you may need to turn to a small business lawyer.
Sole Proprietorships
Sole proprietorships are the simplest of all legal structures but they also lack many of the legal and financial protections of other business forms. If considering starting a business as a sole proprietor, remember there are various advantages and disadvantages. Sole proprietors experience the key advantage of being their own boss, but concurrently shoulder the burden of being responsible for the business's success and failure. This section provides both basic and in-depth information about sole proprietorships, including tax implications, state registration requirements, what to expect when running a business with your spouse and more. It also features step-by-step help to get you get started.
If you are electing to run a business by yourself, you'll need to learn how to choose a business name. Many sole proprietors choose a company name other than their legal name. If you do, you'll need to file a "doing business as," (DBA) with the county where the principal place of business is located. For example, if your name is John Smith and you choose to name your business "Bob Jones Trucking Company," be sure to file the proper forms.
Whether this is your first year as a self-employed entrepreneur or your tenth, income taxes are here to stay. While the complexity of filing the correct taxes forms can seem overwhelming, it's important to get it right the first time. Being in business for yourself means you are required to list your business's profit or loss information on Schedule C (Profit or Loss from a Business), which you will submit to the IRS along with Form 1040. There are several deductions you will be allowed to take, but be sure to seek guidance from a tax attorney or other qualified professional if you have questions.
Throughout the country, an increasing number of spouses are choosing to operate family businesses. As such, they both consider themselves to be "joint owners" of the business. The IRS, however, may consider this to be a "partnership," even if that is not the couple's intention. As a partnership, the couple will be required to file a partnership return and issue a tax document known as a Schedule K-1 to themselves (as opposed to reporting on a Schedule C). For many family businesses, it will be wise to seek the guidance of a tax professional to further understand their potential liability and obligations.
One of the major disadvantages of running a sole proprietorship is the personal tax liability you will incur. In other words, there is no legal separation between business and personal liability. For instance, if you took out a loan to help buy office supplies or a new computer, your creditors can sue you personally if you default on your obligations. Keep in mind, many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.
Hiring the best business attorney for your sole proprietorship needs is an important process. Small businesses, such as sole proprietorships, often need help with negotiating contracts with customers or suppliers, assisting with real estate needs (such as a lease or a building purchase), taxes, zoning and licenses, protecting intellectual property, or settling litigation. The right business attorney can save your organization money and time in dealing with complex legal matters.
Partnerships
Partnerships are the simplest type of legal structure to form for businesses with two or more principles; but while partnerships have no formal paperwork requirements, they usually don't protect partners from liability. Partners can also clash over numerous matters relating to the business, including conflicting work ethics and financial goals, and even roles in the business and leadership styles. Here you will find tips on legal and tax issues related to partnerships and a "Partnership QuickStart" tool that walks you through each phase of the start-up process.
You may be surprised to learn that business partnerships do not have corporate tax status. What this means is that the Internal Revenue Service (IRS) doesn't have the power to tax them directly. Conversely, the government simply taxes the profits that flow to individual partners as personal income. When a business partner files his or her personal income tax return, he or she will need to declare their operating losses and profits to the IRS in Form 1065.
Also referred to as "business continuation agreements" or "buyout agreements," a buy-sell agreement is a contract that provides for the possible future sale of your business interest or purchasing your co- owner's interest. One reason partners tend to enter into a buy-sell agreement is due to concerns about the health of one partner. If a co-partner dies, it will affect the operation of the business. A fully-funded buy-sell agreement can help eliminate any doubts about the future of your company.
There are three types of partnerships that businesses can choose from when forming a partnership: general, limited or joint venture. While there are benefits and disadvantages to all three, in a limited partnership at least one owner is a general partner and at least one owner is a limited partner. The general partner(s) makes everyday business decisions and becomes personally liable for any debts the business incurs. The limited partner, however, doesn't handle daily operations, but simply invests and reaps the benefits of any profits. Basically, a limited partner enjoys a protected investment.
In a normal business arrangement, income, gains, losses, deductions, and credits are distributed according to each partner's or member's ownership percentage. However, when the partners set up a "special allocation," income and expenses are redistributed according to the allocation or agreement. Keep in mind, IRS rules must be followed if you want to divide profits and losses in a way that's disproportionate to the owners' interests in the business.
Unfortunately, partnership rules and regulations can be extremely complicated. If you want to set up a special allocation, you'll need expert help to make sure that your allocation will comply with IRS rules. A business lawyer can draft special language for your partnership agreement or operating agreement to ensure that the IRS will accept your special allocation. An attorney specializing in partnerships can help you formulate your buy-sell agreement and even help reduce your tax liability for the future.
Corporations
Corporations are limited liability partnerships that are separate and distinct from their owners. In a corporate business structure, shareholders have the right to participate in profits but are not held personally/financially liable for the company's debts. This section contains information and resources for small business owners who are interested in forming a corporation. Here you will find tips on legal and tax issues related to the corporation -- including the creation of articles of incorporation and corporate bylaws -- and tools that walk you through each phase of the incorporation process.
A professional corporation (PC) is an organization of professionals in the same field who wish to incorporate their practice such as doctors, lawyers, or accountants. In many states, this is the only option for individuals hailing from these careers who want to incorporate. PCs offer their owners several benefits such as limited personal liability for business debts.
Ownership changes can have a lasting impact on your business. If you form your corporation with a shareholder buyout agreement, you will have the benefit of transferring your partnership without disrupting operations. Owners of a corporation can control the transfer of shares by executing a separate buyout agreement and making sure to keep accurate records of the nature of each shareholder's investment in the corporation. These provisions are typically included in the articles of incorporation, the by-laws, or in a separate written agreement.
Corporate bylaws are rules that govern the daily operations of your business. Considered by many as the most important document of any organization, they establish and protect the rights, and specify the duties and responsibilities of an organization's members, Board of Directors, executive committee, and others. Each set of bylaws will be specific to that organization, but typically they will include the Organization's name, purpose, and location, a list of its members inducing who is on the Board of Directors and list of officers. It will also spell out the nature and timing of meetings and give instructions on how to amend the bylaws.
Delaware, also known as a "tax haven," has a reputation as having the most business-friendly laws in the country. Numerous corporate giants are incorporated in the tiny state including Apple and Coca-Cola. The state of Delaware does not collect corporate taxes from businesses who do no operate in the state. Nor does the state collect tax royalty payments or are you required to publicly divulge the name of your corporation's board of directors or shareholders.
Forming a new corporation can be an exhilarating process, but you should think carefully before deciding to do it on your own. You may want to consider hiring a competent business attorney who is responsive, and experienced with the types of legal issues with which you will need help. The considerations that go into incorporating a chain of coffee shops, for instance, can be very different from the considerations for incorporating a telecommunications company.
LLC's
A limited liability company, also known as an LLC, is a business structure that has features similar to both corporations and partnerships. LLCs protect owners from certain liabilities, including business debts, while the legal structure allows for a flexible management arrangement. This section includes an overview of limited liability companies, a comparison between LLCs and corporations, tax information, and resources to help you craft an LLC operating agreement and file your articles of organization and more.
Each state has their own laws surrounding how to start an LLC. Your first step is to understand those rules and regulations and determine if an LLC is right for you. Typically speaking, you'll want to choose a business name and then learn whether that name is available. Some states require you to have the words "Limited Liability Company" in the title. You may also need to prepare and file Articles of Incorporation, prepare an operating agreement, obtain any necessary business licenses, and more.
One of the biggest advantages of forming an LLC is that members are not personally liable for the debt and liabilities of the business. However, this is not always the case if you and your partners commingle personal and business funds. If your LLC is sued and you cannot demonstrate separateness between business and personal finances and expenses, you and your partners may become just as liable for the debts and liabilities of the business as is the LLC. Setting up an LLC bank account adds a layer of protection for members of the LLC.
The short answer is, "it depends." Depending on the type of business you will be operating, you may need to obtain a combination of federal, state, and local licenses to legally set up shop. Businesses requiring a federal license usually involve interstate commerce such as trucking, agricultural products, alcohol, aviation, firearms and weaponry, fish and wildlife, maritime transportation, mining or drilling, nuclear energy and broadcast communications. Those professions requiring a state license run the gamut from doctors and lawyers to teachers. Finally, there are a plethora of local licenses you may have to obtain depending on the nature of your LLC such as operating a food establishment.
One of the key benefits of forming an LLC is pass-through taxation. With pass-through taxation, business partners pay taxes on all business profits on their individual tax returns. Essentially the business income "passes through" the business to the owners' tax returns. Each member will have to report their share of profits and losses, but this structure assures the member will avoid double taxation.
Every state has different laws regarding the formation of an LLC. Understanding the basics and seeking help from a legal professional when you need it can save you time and money later down the road. A business attorney in your area can help you with matters such as how to name your LLC, assistance with drafting a buyout agreement, understanding the tax implications of your LLC, and more.

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