By Mark A. Pearson
One of the questions we here at ARC Law Group hear quite often is, “Can you help me start a business?” The short answer; when Anne and I started ARC Law Group our main goal was offering access to legal advice for all entrepreneurs in every endeavor imaginable. I think I speak for Anne when I say that we take a lot of pride in helping our clients start a business from nothing more than an idea.
With that in mind, I thought it might be helpful to lay out a short outline of some issues you might encounter when starting a new venture, and how having an attorney and other professionals on your team often make the process a little easier. This article is by no means, all encompassing, and I encourage you to seek answers to your questions from a variety of sources. I also highly recommend that you consult with professionals who are trained to help you maneuver through the process of starting a business. Financial advisers, tax professionals, accountants, insurance brokers and lawyers are invaluable resources to anyone thinking about becoming a business owner.
First of all, congratulations on simply thinking about starting a new business; it’s a real challenge, but can be extremely rewarding. Business ownership can lead to financial rewards, creative freedom and a chance to be your own boss. That having been said, there are a number of risks involved, and a huge time commitment is needed to get started.
Getting Started
Initially, you need to think about the type of business you want to start. Get out a pen and notepad and start writing your ideas – brainstorm! You’ll use this information to form your initial plans and help give you guidance on what you want to do, and what you need to help you get there.
Once you’ve written out your initial plan, show it to your friends, colleagues, family and anybody you are thinking about partnering with. See what they have to say; you’ll learn what gaps might need to be filled. Next, meet with an accountant, various financial advisers and a lawyer, of course, to discuss the feasibility of your plan.
At this point you should have all of the information necessary to make the ultimate decision of starting the new business. Often, it’s during this initial stage that you realize you’re not ready to start something new. As a lawyer, I often have to give clients candid advice about their ideas. Sometimes, it means counseling the client against continuing. However, being advised not to start something new doesn’t mean you have to give up. There are plenty of alternatives to starting a new business.
Buying an existing business or a franchise is an option. Why re-invent the wheel, right? Purchasing a business that is already operating takes some of the “guess work” of starting something new out of the equation. Plus, you don’t have to worry about some of the startup issues like buying equipment or hiring employees.
It’s All In the Name
Hopefully, this was one of the first things your brainstormed! There's a lot riding on your decision; starting with picking something you’re going to want to say. The name also needs to stand out among the competition, but don’t alienate potential customers with something to bizarre.
You’ll probably want to check and see if the Domain Name is available. Having a web presence is going to be important for just about every new business. Remember that there are various top level domains, like .org, .biz, and .us that might work if the traditional .com is taken. Domain names are not registered through state or local government; rather they can be obtained through numerous online businesses
Naming your business often requires following a formal process, which varies depending on the business structure you choose (see below), with most states having filing requirements for using a fictitious name. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name
Finally, your name might infringe on a trademark, a true deal-breaker!
Choosing an Business Structure
Choosing the correct business structure is extremely important. At ARC Law Group we carefully counsel and educate our new business clients on the many factors to consider when choosing the best form of business ownership or structure. Ultimately, the choice will impact taxes, liability and ownership succession.
Business structures are broken down into four major categories: sole proprietorship, partnership, limited liability company (LLC) and corporation. Each category has its own risks, which can be explained further by contacting an attorney.
Sole Proprietorship
The simplest business structure and, by far, the least costly way of starting a business; a sole proprietorship can be formed by simply opening the doors for business. You are personally liable for all business debts, and can sell or transfer all or part of the business without much hassle. When it comes to taxes you will probably report profit or loss on personal income tax returns*.
Partnership
A general partnership can be formed simply by an oral agreement between two or more persons, but it’s best if a legal partnership agreement is drawn up by an attorney. Profit, loss and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return.
Limited Liability Company (LLC)
A limited liability company (LLC) is a structure that gives its owners limited liability for the entity's debts and obligations, similar to the status of shareholders in a corporation, and its income and losses are normally passed through to the owners as if it were a partnership. The LLC structure is created by filing a document (usually called Articles of Organization) with an officer designated by state law. Currently, the LLC is fast becoming the most used form of ownership for new small-businesses. While it’s easier to form than a corporation, it’s still highly advisable to hire an attorney to file the Articles and draft your operating agreement. Sometimes, it’s not as easy to fund a LLC as it is a corporation.
Corporation
A corporation is the most complex and most expensive way to organize a business, and it’s strongly recommended that you work with an attorney to form a corporation. Control of a corporation is dependant on stock ownership and is exercised through the board of directors and annual stockholders' meetings. Corporations must keep records and hold meetings. Small, closely held corporations can operate more informally, but record-keeping cannot be eliminated. Officers of a corporation can be liable to stockholders for improper actions – think Enron. Liability is generally limited to stock ownership, except where fraud is involved. You may want to incorporate as a "C" corporation or "S" corporation, based on tax and funding plans.
Every Structure Needs Some Support
Now that you have picked a structure you’ll need a bunch of supporting documentation, licenses and tax related information to get you started. This is a partial list of a few things that almost every new business needs to think about.
Business Licenses
Your business will almost assuredly need to get a state or local business license to operate legally. Certain types of trades and services, ranging from being a barber to brain surgeon, also require state and local licensing. A good attorney can help you navigate through the, often confusing, state and local agency requirements.
Employer Identification Number (EIN)
To pay federal taxes, withhold Social Security contributions for employees and for other reasons, a business needs an Employer Identification number. You want to open a bank account, right?
Taxation
It's highly recommend that you seek out the assistance of a tax professional to assist with filing various important forms with the IRS. The IRS itself has publications and information on its website, to get your started.
Insurance
Business insurance, secured through a broker or agent, protects the contents of your business against fire, theft and other losses. It is prudent for any business to purchase a number of basic types of insurance, and some businesses are required to carry insurance by law.
Trademark
We mentioned not wanting to infringe on someone else’s trademark when choosing a name, but you may want to secure your own rights in a mark. Registering a name or distinctive logo can be accomplished through state Secretary of State offices, and for wider marketplace protection, through the U.S. Patent and Trademark Office (USPTO). ARC Law Group has helped a number of new clients secure trademark rights via the application process and by licensing rights in the event that a mark is already in use.
Money Money Money!
Probably the most important part of starting a new business is figuring out how to pay the bills! Capital can come from your personal savings, a bank loan, an investor, a credit card or a combination of all four. Consulting with financial experts to indentify all of the necessary costs associated with your project is a good first step. Next, you’ll want to work with your attorney to make sure you’re equipped to secure capital. Remember, the business structure you choose may dictate the way your raise funds. For example, raising capital through the sale of stock can only be accomplished through a corporate structure. Depending on your venture you might qualify for small business loans or even draw interest from angel investors.
A Note on IP
Since many of ARC Law Group’s clients start businesses that create or utilize Intellectual property it’s worth noting that you may want to start thinking about how to protect or secure rights during the startup process. Your business name, the logo for your business cards, a slogan to make you stand out from the competition, or a product or service, you’ll want to protect all these ideas from the get go. You might also need to license the copyright in some software to integrate into your business, or license music rights for your website or nightclub.
As you can see, setting up a new business is a long and detailed process that has a number of pitfalls. Would it surprise you if I told you that this article barely scratched to surface of many of the issue and topics presented? It’s true; and that’s why I recommend you continue your research, and speak to as many friends, family members, colleagues, other business owners and professionals as you can before making the decision to start a new business.
Good Luck!
Mark A. Pearson is a founding partner at ARC Law Group. He considers counseling clients on starting new business ventures as one of his favorite things about being an attorney. Mark can be reached at mark@arclg.com.
You understand and agree that use of this blog does not in any way create or establish an attorney-client relationship between you and any ARC Law Group attorney. You should recognize that the information provided on this blog is provided for your general information and should not be relied on as legal advice and is not a substitute for direct consultation with an attorney about a specific legal problem.
