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Congratulations on your decision to start a business! You have an exciting journey ahead of you, but you also have a few roadblocks and obstacles; one obstacle is business formation. Before you get your business off the ground, you need to decide what type of business structure is best for you, and you need to take the proper steps to legalize that business formation. A qualified lawyer can help.
At UpCounsel, we want to help you save time and money forming a business the most efficient way possible, based on your needs and goals of forming a company.
With the many challenges that come with starting a business, dealing with expensive lawyers and extensive paperwork should not be one of them.
By having an experienced business attorney on your side to make sure everything runs smoothly, you can save a lot of time and investment, while concentrating on what matters most - growing your business.
To get started with forming your business, post a job for free and get several proposals from expert business formation attorneys who can help you today.
Why Hire a Business Formation Lawyer
Why Hire a Business Formation Lawyer
Top business lawyers can help you choose the most helpful business structure for your goals.C-Corporation
This is the most common type of corporation. It’s a business entity in which its profits are taxed separately from its owners. Therefore, if the business gets into financial trouble, you're unlikely to have to use your personal finances to make up for the deficit. A C-Corporation can have an unlimited number of shareholders, and it is flexible when it comes to shareholder rights and ownership. However, taxes for this type of business structure are usually more complicated than other business structures.S-Corporation
An S-Corporation, commonly referred to as an "S-Corp", is simply a corporation that has filed a document with the IRS to become a special type of corporation. By electing to be treated as an S-Corp, the corporation can avoid double taxation. Corporate losses, income, credit and deductions can be passed through to shareholders, rather than once to the corporation and once to the shareholders. An S-Corp only allows a specific amount of stock to be distributed and all holders must be United States residents. Shareholders rights are much simpler here and double-taxation that occurs with a C-Corporation’s income is eliminated.Partnership
This is when two or more people own and run a business together. There are two types of partnerships:
- General partnership. In this arrangement, the partners work together to operate the business.
- Limited partnership. Limited partners are investors only. They have no part in running the business. This type of arrangement has both general partners and limited partners.
In a partnership, profits and losses of the business pass through to the partners, so the business avoids double taxation. However, if something goes wrong with the business, the partners will be personally reliable for the financial losses.Limited Liability Company
A limited liability company or “LLC” is a hybrid between a partnership and corporation. Forming an LLC will create a legal entity distinct from its owner “members” granting limited liability like a corporation, but will have fewer formalities like a partnership in terms of taxes and centralized management. LLCs are not taxed as a separate business entity and all profits and losses are "passed through" the business to each member of the LLC. The LLC members report any profits and losses on their personal federal tax returns, just like the owners of a partnership would.Sole Proprietorship
In a sole proprietorship, a single person is responsible for operating the business and is personally responsible for the business' finances.Is a Lawyer Necessary to Form a Business?
In some cases, forming a business is fairly straightforward. However, questions may arise that you'll need expert help to answer. For example:
- Can you incorporate in one state and then operate in another? This is possible, but it may bring about complications. It is best to stay aware of all the potential consequences of doing this. It is usually advisable to incorporate in the state where you will be operating.
- If your business is fully online, does it matter where you incorporate? Incorporating in certain states, such as Delaware, can provide certain financial benefits. However, every situation is unique and may require a lawyer's expertise.
- What information should a contract between partners include? The contract should include information about the partners' responsibilities and ownership. It should also outline how the partners will resolve disputes and what happens if one of the partners passes away or becomes incapacitated.
- What steps do I need to take to make sure the business is valid and can avoid fees?
- What formalities does my corporation need to follow? For example, there should be board of directors meetings and shareholder meetings.
- How should I go about choosing a name for my business and registering it? You may have to search trademark databases and do other research before you choose a business name.
Choosing a business structure is just one of the steps you need to take when you're putting your business together. You also need to write a business plan. This plan needs to include the following:
- Executive summary. This is an overall summary of your business.
- Company description. This includes information about what you do, what makes you different from other businesses, and what markets your business targets.
- Market analysis. What type of demand is there for your service or product? What demographics will you focus on?
- Funding requests and financial projections. This will help you plot out your business's finances for the first three to five years of its operation.
You may not need a lawyer to write a business plan, but they can help polish your business plan and alert you to any potential legal pitfalls that might complicate how your business operates.
A lawyer can do even more to help you get your business off the ground. They can help you:
- Learn the legal steps you need to take to hire and classify employees. It is important to pay certain taxes. Also, you must know how to differentiate correctly between employees and independent contractors.
- Review any lease agreements for your brick-and-mortar business. In what capacity can you use the building? Does the owner want a share of profits in addition to basic rent? What if you want to end the lease early? Your lawyer can review the language in the contract and help you negotiate any changes that you feel are necessary.
How to Find the Best Lawyer
How to Find the Best Business Formation Lawyer
Clearly, having legal help on your side can help you get your business off the ground in the right way. But how do you narrow your search down to the top attorneys?Know Where to Look
There are a few sources you can turn where you can find attorney listings:Personal Referrals
Talk to other entrepreneurs you know. Which lawyer did they hire to help them, if they hired a lawyer at all? Ask the following questions about your friend's experience:
- What services did the lawyer perform for you?
- Do you feel like the lawyer treated you fairly?
- Do you regret not hiring a lawyer? (If your friend didn't recruit legal counsel.)
- What was the lawyer's personality like?
Getting this firsthand knowledge from someone you know and trust can give you a realistic idea of what to expect as you embark on your business journey.Local Directories
You can check local directories and basic online listings for business lawyers. However, this search method has its limitations. You may not have access to trustworthy reviews. You can use local directors as a place to start your search, but you shouldn't rely solely on them.UpCounsel
UpCounsel is a trustworthy legal marketplace. You can post a job and quickly receive quotes from top lawyers in your area. We are picky about whom we accept to our site. You'll find that our lawyers are graduates of top law schools and have the necessary experience to give you top-notch service.
Finding the Perfect Business Formation Lawyer
There are many things you should look for in a lawyer, but there are also some things you should avoid:
- The lawyer talks over your head and doesn't explain legal jargon.
- The lawyer isn't upfront about fees and billing.
- The lawyer doesn't seem confident in handling the tasks you need them to do.
- Something just doesn't feel right.
All too many new businesses fail. Sometimes, they may fail because the owners didn't take care of all the necessary details when they were setting the business up. A qualified lawyer can help you cross your Ts and dot your Is so you don't become the victim of your own misstep.
Look for an experienced business lawyer who can help you choose your business structure, register your business name, write bylaws, and carry out other essential tasks. UpCounsel is the perfect place to start your search.
Questions to ask
Questions for Your Business Formation Lawyer
Ask these key questions when you're interviewing a potential business formation lawyer:How Much Experience Do You Have?
Having an intelligent, well-educated lawyer on your side is important, but you shouldn't underestimate how vital experience is. Ask:
- How many cases have you handled like mine?
- Have you helped other budding businesses in my industry?
- Have long have you been in practice?
- Do you have any special skills or certifications?
You can also ask questions about the track record of the firm in general. You might end up working with this lawyer's coworkers or even paralegals, so you should feel comfortable with the law firm as a whole, not just with the lawyer you're meeting with. Ask:
- What is the average years of experience for lawyers at your firm?
- With whom will I be working the most? Will this person be easy to reach?
- If no one at your firm is comfortable dealing with a legal issue I might encounter in the future, can you refer me to someone else?
When you're first starting a business, you need to watch every penny. Ask:
- Do you require a retainer? If so, how much? If I don't use the entire retainer, will I get a refund?
- Do you bill the initial consultation at your hourly rate? If yes, will I get a credit on my bill for the consultation after I hire you?
- Does your hourly rate cover all your services, or do some services come with an extra fee?
- How often will I be billed?
The law doesn't require that attorneys carry legal malpractice insurance, but it is wise to narrow your search to lawyers who do have this coverage. You hope you can trust your lawyer but, if something goes wrong, you want to get compensation. Ask:
- How much malpractice insurance do you carry?
- What types of incidents does the insurance cover? Some policies are very specific about what they will and will not cover. For example, some won't cover fraud or theft.
Hopefully, this is something you already discovered in your earlier research. If you find that an attorney was accused of misconduct, use the interview to find out more about the incident, and then make a well-informed judgment call about whether you can trust the attorney.How Do You Handle Conflicts?
When you're first putting together a business, lawsuits or other disputes are uncommon. However, if something comes up that requires a lawsuit, you want to know how the lawyer would go about solving the issue. Do they tend to settle outside of court, or do they prefer to go to court? What factors does the lawyer take into account when making this type of decision?
Forming a basic LLC can be done for as little as $500 (including all filing fees). C-Corporations, which are a bit more complex, can be formed for as little at $1000 (including all filing fees) depending on the complexity of the shareholder and investor relationships.
Why should I consider incorporating my company?
There are a number of advantages to forming a company to house your business. However, the main reason you should incorporate is for personal asset protection. When you operate as a sole-proprietorship, you are entirely and personally responsible for the actions of the company. Incorporating allows the business owner to separate and protect their personal assets in case of a lawsuit or claims against a business entity.
Another reason to incorporate is for perpetual existence. A sole proprietor or partnership usually ends on the death of the owner or owners. Forming a corporation ensures that your company's legacy can be preserved, as well as continue to provide employment and services for clients should any changes in ownership take place.
There are also several tax advantages and benefits of incorporating a small business. While profit and loss typically "pass-through" an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid double taxation of corporate profits and dividends by filing a IRS Subchapter S tax election form.
Do I Need to Form an LLC or a Corporation?
Many small businesses question whether they should start an LLC or a Corporation. The relative simplicity and flexibility of an LLC is typically better for businesses who want to avoid heavier fees early on with few tax obligations.
- Both an LLC and a corporation typically do not take any personal responsibility for the business’s debts and liabilities. Both types of businesses do not take liability because they are separate legal entities created by a state filing.
- LLCs are what people like to call “pass-through” tax entities, which means that all the profits and losses pass through the business to the owners who report their share of the profits on their personal income tax returns. An LLC can be taxed like a corporation by stating so in its Operating Agreement. A corporation will not share these easier taxation laws, as a corporation is a separate taxable entity. You will need to file a corporate tax return, reporting the profits and losses of the business. These profits are taxed at a corporate level and any corporate income distributed to its shareholders will be taxed at the shareholders personal income tax rate.
- To raise capital, corporations have the ability to sell ownership shares in the company through stock offerings, while LLCs can only sell interest in their company. Businesses who are going to need venture-backed funding or need to pay employees in stock are going to need to form a corporation.
As you can see, there are some important differences between LLCs and Corporations and it’s crucial to distinguish the pros and cons of each before making a decision.
What’s the difference between a C Corp and an S Corp?
C Corps allow for an unlimited amount of shareholders and can be owned by other corporations such as LLC’s or even trusts. C Corps have more flexibility as well with shareholder rights and ownership, but typically face tougher tax implications because of this. This is due to a corporation’s ability to offer ownership shares in the business through stock offerings when a corporation goes public through an IPO (Initial Public Offering).
An S Corp is simply a corporation that has filed a document with the IRS to become a special type of corporation. The main difference deals with taxation issues, but additionally, an S corporation only allows a specific amount of stock to be distributed. Shareholders rights are much simpler here and double-taxation that occurs with a C corporation’s income is eliminated.
Are there disadvantages to incorporating?
Corporations are governed by local, state, and federal regulations to a greater degree than are other businesses. A corporation needs annual meeting votes, a minute book, financial records, separate income tax forms, and an annual report with a filing fee to the designated state authority you incorporated in. Regulatory and record keeping guidelines and requirements often make it necessary for corporations to make additional investments devoted to seeing that those legal requirements are met. In addition, there are fees associated with incorporating that business partnerships and sole proprietorships are not subject to.
Also be aware that while incorporation provides significant protection of owners' personal assets from repercussions of business downturns, it also means that you are not allowed to tap into the corporation's account for assistance in meeting personal debts.
Double taxation on a C-corporation's income occurs with income taxed to the corporation and again to the owners when distributed to them as dividends. To avoid it, the sub S election, available for most small businesses, allows the S-Corp owner to be treated like an individual. There are numerous factors to consider in making this election, and they may vary with changes in your priorities and number and tenure of employees. Deciding whether to be taxed as a C corporation or making a sub S election is an important decision. An UpCounsel attorney will ensure that you make the right decision for your particular situation.
Which Corporation is best for my needs?
Each business type has its advantages and disadvantages. An UpCounsel attorney will help you through the pros and cons and analyze which is best for your situation and help you file the correct federal and state paperwork.