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THINGS TO CONSIDER WHEN STARTING A NEW BUSINESS

By By Richard K. Barra

  With a booming economy, many people are anxious to make their marks in the world through their own unique business ventures. Many opportunities lay out there in the "real world" and you might as well be the one to seize those opportunities. Before you set out to sell your sweet iced tea based on Grandma's recipe or open the most pain-free gym in the country, you should carefully consider the type of business entity which would best serve your interests. Formation of the appropriate entity is much easier, cheaper and smarter at the beginning before you conquer your market.

  Before starting your business, you should take the following steps:

  1. Contact your accountant or tax adviser to discuss the best type of entity to use. Many options are available - sole proprietorships, "C corporations, "S" corporations, general partnerships, limited partnerships, limited liability companies, limited liability companies, limited liability partnerships, etc. Each entity has specific tax implications which must be considered before organizing. For example, if you form a "C" corporation (which is a normal corporation), any profits made by the corporation are taxable. If the corporation then takes those profits and distributes them to the shareholders as dividends, the shareholders then also pay tax on the same money. If you form an "S" corporation, you can avoid this "double taxation" as the profits are deemed to automatically pass through to the shareholders.

  2. You should also discuss the choice of entities with your attorney. In addition to the tax ramifications, each business entity has different characteristics and requirements, as well as advantages and disadvantages. The choice of type of entity will depend upon many factors, such as: (a) the number of principals involved; (b) how involved the principals want to be in management; (c) the liability that the principals are willing to assume; (d) the amount the principals are willing to spend to organize and maintain the entity; and (e) the reason or purpose for organizing the entity. For example, if one person wants to form a business entity, he or she can easily and cost effectively form an "S" corporation (which would avoid double taxation) and act as the sole shareholder, director and officer of the corporation. This individual would totally control the operations of the corporation and would be shielded from individual liability (assuming proper organization and management of the corporation). If, however, two or more people wish to form a business entity, another type entity may be preferable. For example, if one person will control the management and operations of the business and the others are just passive investors, a limited liability company may be the appropriate option. The controlling principal could be the general partner, and the remaining principals could be limited partners. The limited partners would not participate in the management of the partnership, and their liability would be limited to the amounts of their investments.

  3. Once you decide upon the type of entity, you will need to pick a name. You will need to avoid using a name that is deceptively similar to a trade name which is already in use. Once you pick a name, you should make a good faith effort to determine that no one is using a similar trade name which could cause confusion to the general public. At a minimum, you should:

(a) check the records of the Department of State of the state in which you will be doing business for name availability. Please remember you should check under all categories, not just the category for the entity you are forming. For example, the Florida Department of State has separate listings for: (i) corporations and limited liability companies; (ii) general partnerships; and (iii) fictitious names. Even if you are forming a corporation, all categories should be checked. Just because the state allows you to file under a certain name, does not guarantee that no one else is using that name!; and
(b) check the phone books in the jurisdictions where you will be doing business to see if there are any similar names.
Avoid using names that will obviously lead to confusion and potential liability for unfair trade practices. Don't call your hamburger stand "McDonnell's" or you will be getting threatening letters.

  4. Once you select the type of entity and name, obtain the necessary documentation to properly create the entity. An attorney will be able to prepare this documentation and guide you through the maze of requirements. Several other entities also provide organizational services. You should carefully choose whom you hire to assist you. Although some companies promise "cheap" incorporation, you may not be obtaining complete documentation and information necessary to set up your entity, or to avoid personal liability. For example, you can file simple articles of incorporation with the Department of State of Florida and your corporation is officially formed. You still, however, need to adopt bylaws, hold an initial meeting, obtain and issue stock certificates, and obtain a minute book, to complete the organizational process. Failure to complete the process could lead to personal liability for obligations of the entity.

  5. Once you form your entity, make sure that you obtain a Federal Employer Identification Number by completing and submitting a Form SS-4 to the IRS. If you elected to form an "S" corporation, you will also need to complete and timely file a Form 2553 with the IRS.

  With your new business entity in place, you can now set yourself free on the marketplace. With hard work (and a little luck) maybe we'll see you on the Forbes list soon.

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