In the current age of valuing entrepreneurship, start-ups, and new creative solutions to issues, it is important to understand the steps that must be taken to form a new company. The decisions made at each step have varying legal implications, so it is crucial to understand the specific impact of these decisions in relation to the type of company to be formed.
The first step in the company formation process is selecting a name for the company, and ensuring that it is available to be used and does not too closely resemble another company’s name. It is advisable to search the United States Patent & Trademark Office’s database to determine whether any names have been trademarked that are either identical or similar to the desired company name.
The next step in the company formation process is registration. The legal business structure and the state of registration or incorporation must be chosen at this time. The most common business structures for small businesses are limited liability companies (LLCs) and corporations. LLCs and corporations are similar in that they both limit the personal liability of the owners of the company from the business debts and lawsuits against the business. However, there are major differences between the two business structures, starting with the way that they are formed.
If you choose to form an LLC, the next step in the formation process is to file the Articles of Organization by the owners (which are called “members”) in the chosen state. In the Articles, the name and address of the LLC must be specified as well as the names of members, the registered agent, and a start date. An Operating Agreement will also be drafted to memorialize the decisions made for management of the business’s activities, as well as each member’s share of the company. The Operating Agreement will also specify whether the LLC will be managed by the members or managers.
If you choose to form a corporation, corporate organization documents must be filed. These documents create a board of directors, who help to draft operating documents and select bylaws for the company. The Articles of Incorporation should include the name of the corporation, address, registered agent information, name and address of incorporator, duration (unless perpetual), effective date, and signature of the incorporator. After the board of directors is chosen, the corporation should issue stock to its shareholders and provide stock certificates. The corporation must choose the number of shares to issue, and the par value for each share of stock.
In selecting which type of business structure is appropriate for your company, there are additional differences to consider. The profits and losses of LLCs pass through to the owners of the business and are reported on the owners’ personal tax returns. Corporations, on the other hand, are recognized separately, and the profits and losses of the company are held by the corporation itself. The way these business entities are taxed differ as well. Owners of a corporation are taxed on the income they receive from dividends. Members of an LLC are taxed on their personal tax returns based on the amount of profits they received that year. Further, many formal requirements are imposed upon corporations that are not imposed upon LLCs.
As stated above, both business structures require the appointment of a registered agent who will be responsible for legal and tax documents for the company. Next steps in the formation process include obtaining an Employer Identification Number (a nine-digit number that identifies the business entity) and opening bank accounts to avoid commingling personal and business funds. Additionally, it is recommended that the owners of the business research whether any specific licenses will be required in order to operate the business legally, and to obtain those licenses and permits as required.
Following these steps to forming a business will ensure that your business can operate legally. These decisions regarding the structure and type of company should be made with due care, and those seeking to form a new business may opt to obtain legal counsel to assist with making these decisions for the new company.