Starting A New Company

The idea to start a business strikes most people at least once in their life. The motivations vary, but the challenges a new business owner must face to be successful are universal.

First, you must determine exactly what you want to accomplish by starting your business. Will it be part-time while you remain employed elsewhere? Do you have access to funding that can be used to establish the business and support you until sales start coming in? Do you have experience in the technical aspects of the business, or will you hire people to perform the technical aspects so you can manage the company? Will your business provide services primarily or exclusively to a former employer or business associate?

The answers to these questions will help you lay out a plan for how to set up and operate the business. Before moving forward, you should consider how your business will make money. Retail businesses that deliver goods on a cash basis have different cash flow concerns than consulting businesses that provide services and receive payment 30-90 days after billing. The retailer may get paid at or very soon after delivery to the customer, but s/he will have expenses that precede the delivery, such as maintaining inventory, that must be covered until payment for the sale is received. The consultant must cover overhead expenses during the marketing and sales period, through conducting the work and billing, until payment is received. Planning your business cash flow is important if you expect to survive the first few months.

There is a significant difference between having a job where you perform certain functions and owning a business which delivers those same functions to its customers. From marketing and sales strategy development and execution to financial management, there are numerous aspects of your business that you, your employees, or outside service providers must manage for your business to run efficiently and be successful. You must decide what you can and will handle, and what you can afford to let someone else take care of, so that you can concentrate on the things you do best for the business.

Structure
Corporations
LLCs
Business Trusts
Business Structure Options

Structure

An important first step is to decide how you want your business to be structured. This analysis is not easy when you are the sole member of the company, and it can be even more complicated when you have partners. Partners must understand each other's skills and abilities, and have a system for monitoring their business activities. One such system we recommend is utilizing contracts that clearly designate the responsibilities of each partner. These provide an avenue for action should a partner fail to meet the specific, measurable goals outlined in his/her contract.

When choosing the legal structure of a business, people often tend to make the decision based solely on tax reasons. We find this approach focuses too much on reducing income tax and overlooks protection from liabilities. The right structure will help you accomplish both objectives.

Going into business as a sole proprietor provides absolutely no liability separation between activities of the business and owner's personal assets. In partnerships, each partner is liable not only for his/her acts, but also those of the other partner(s). All personal assets of all general partners can be attached to resolve liabilities created by the acts of any partner. However, partnerships do have advantages. Division of profits and responsibilities is subject solely to the partnership agreement negotiated and signed by all the partners.

Business owners can gain protection from liabilities by forming separate legal entities to conduct the business. The most common entities used are the corporation, the limited liability company, and the new business trust. Each has distinguishing characteristics that make it better suited for certain business situations or for certain equity-holders.

Corporations

A corporation is its own entity, separate from its owners, or shareholders. The corporation has unlimited life, unaffected by ownership change. It can be taxed, sued, and can enter contracts. Its shareholders enjoy limited liability for the corporation's debts or judgments against the corporation; they can only be held accountable for their investment in company stock. Sale of stock can be used to raise funds for the corporation. In some cases, the corporation can elect subchapter S status that allows it to be taxed similarly to a partnership.

However, corporations tend to be time-consuming. They are required to meet annually with the shareholders, hold an annual meeting of directors, and file an annual report. They can also sometimes result in higher overall taxes because dividends to shareholders are not deductible, so can be taxed twice. For these reasons, we usually recommend exploring the option of forming a Limited Liability Company (LLC).

LLCs

An LLC combines the tax advantages and operational flexibility of partnerships with the liability protection of corporations. Unlike corporations, LLCs do not have stock, so they avoid the dilemma of double taxation. However, because they do not have stock, they also do not have the benefit of raising funds through sale of stock.

An LLC's organization is more formal than that of a general partnership, but with fewer requirements than a corporation. They involve less paperwork and meetings than corporations, so are more flexible in management and organization. Unlike a corporation, an LLC's lifetime is set at formation, but sometimes can be continued at expiration. As in a corporation, the entity's liability is separate from its owners.

The limited liability company is a hybrid legal entity that combines the best attributes of several structures. Overall, LLCs optimize the characteristics of many structures, and are the most advantageous choices for new business owners.

Business Trusts

A business trust is an unincorporated, perpetual, limited liability legal entity. It is designed to provide statutory protection while maximizing flexibility of governance. Its organizational document is a one-page Certificate of Trust, including only the name and address of trust and name and address of initial registered agent. Because of the simplicity of organization, a business trust is a "blank slate" for doing business, and is ideal for mutual funds, real estate investment trusts, and mortgage and other finance entities that securitize assets. We have recently organized business trusts for clients who hold multiple real estate investments.

Business Structure Options