Small Business Formation: Everything You Need to Know
The process of small business formation requires the owner(s) to take certain steps and it will depend on which type of business they choose to form.3 min read
The process of small business formation requires the owner(s) to take certain steps. The required steps will depend on which type of business the owner or owners choose to form.
Types of Business Formations
Limited Liability Company
One benefit that comes with forming an LLC is the limited personal liability that the owners, called members, have on business liabilities and debts. The way an LLC is taxed also has more flexibility. When an LLC has more than one owner, it will be taxed as a partnership. If the LLC has only one owner, by default, it will be treated like a sole proprietorship. The owner or owners of an LLC can modify how the business is taxed by completing and filing forms with the IRS. These forms must be filed within 75 days of forming the business. An LLC can have an unlimited number of members.
A corporation is the only business entity that is allowed to issue different classes of stock and an unlimited amount of stock. However, when a company has at least $10 million in assets and 500 or more shareholders, it must register with the Securities Exchange Act of 1934 (SEC). When the owners of a business decide to take the company public or raise funds through external investors, it must be formed as a corporation.
Corporation owners can determine whether they want the business to be taxed as a C corporation or an S corporation. In a C corporation formation, the tax structure is generally more favorable as the owners can avoid being double taxed, which occurs when the corporation pays taxes on its profits and then the shareholders pay tax on their shares.
How Can an Attorney Help a Small Business Owner?
Small business owners should seek assistance from an experienced business attorney to make sure they understand the best formation for the company.
The job of a business attorney is to advise their clients on the best business entity type during the formation process. This ensures that the business meets all legal requirements for formation, whether you plan to form a:
- Limited liability company.
The process of forming a business often requires completing and filing all required paperwork, such as partnership agreements, operating agreements, or shareholder agreements.
A business attorney should serve as a partner for every small business owner. Throughout the life of a business, many issues may arise that will require the services and expertise of an attorney. Examples of these issues and situations include reviewing, drafting, and negotiating:
- Service and sales contracts.
- Non-compete covenants.
- Commercial leases.
- Non-disclosure agreements.
- Employment contracts.
These documents exist to protect the interests of all involved parties, so you want to be sure that everything you are signing protects your interests.
Business Formations Breakdown
Forming a business is the first step in a major journey that can be full of potential rewards and pitfalls. You should never enter into the business world without a clear sense of where you want to go and the steps you'll need to take to reach your goals. The way you form your business is an important step in the process and one that could potentially change the outcome.
When you launch a business, you must follow all federal, state, and municipal laws that pertain to your industry and the area in which you will operate. You must consider all the business and legal issues before starting your company. Everything could have a legal implication, including the structure, operation, and name of the business. Before you file any documentation, you'll need to decide on the business entity type. Take some time to research each option and determine which will be the best option for your business.
You should also work out the logistical and practical aspects of running your business. You'll need to decide whether your business will provide services, goods, or both, as well as figure out the market for what you will offer. A business must be sustainable to succeed. Once you have worked out all these potential issues, you can start the process of registration and submit applications for all required licenses and permits.
If you need help with a small business formation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.