As we discuss the decisions of starting a new business, the organization of your business, and some of the requirements that go along with operating a business, we want you to know that we are here to help you make those choices. In addition, the expertise and experience that our staff has obtained over the years will be useful in advising and guiding you. Their knowledge goes beyond the information that is not included in the following information. We have established a network of advisors that are willing to work with you to accomplish your needs and goals.
Starting a New Business
Are you thinking of starting your own business? It is thrilling to be opening your own business, but after the excitement has worn off questions concerning the success of a small business will start. It is up to you to maintain and stretch out the “thrill and excitement” period that you have initially and forever. A self-examination is necessary to begin with. Not everyone is equipped to own a small business or handle the impact on your personal life that being a owner creates. You will need to have a good understanding of the essential qualities for owners, and truly assess how your strengths and weaknesses match up. As you evaluate yourself, be honest. You will only hurt yourself if you’re not. List your strengths and weaknesses (everyone has them). What you are really doing is listing the things you like to do–you are good at and the things that you don’t like doing–you are not good at. If you discover that you don’t have all the traits you believe necessary to be successful, don’t despair. There are options. This is just an evaluation and it outlines where you will need to seek help.
On the items that you really don’t enjoy performing, consider hiring someone to handle those tasks. That person should have strong traits and interest in those items. For example, if you don’t like to sell, you can hire a salesperson, or if you don’t like to do accounting work, hire an accountant.
If you’re list includes items where hiring a person just would not be a good solution. Another avenue to consider might be to partner with someone whose skill set complements yours. This partner should have strengths in the areas where you are weak. This is an alternative, but partnerships can present difficulties. Many people partner up with people they know best, such as friends and family members. Beware as these types of partnership as it doesn’t always work well. Some marriages and friendships have been ruined by business partnerships, while others have been very successful. The best advice is to be careful. Make sure the partners are a good match before you go into business together.
Being self-employed is fundamentally different than being an employee. The division between work time and personal time becomes blurred. If a problem arises with the business, it’s your problem, and it won’t go away merely because the business doors have closed for the day.
Decisions you make regarding your business will have a direct impact on your personal life. It is important to measure the impact of opening a new business, not only on you, but also on those individuals that have the most important impact on you–your family. Everyone must be willing to adjust to the changes in your lives. Some individuals experience emotional and physical strain from being on their own and working the hours required it takes to succeed. Consider the day-to-day activities and changes seriously prior to making your final decisions.
One of the biggest difference between being self-employed and being an employee is the source of income for you and your family. Employees can generally expect to receive a paycheck on set intervals and for a fixed or calculated amounts. As a owner of a new small business, you will be paid only when and if the business generates enough money. Rarely does a successful business generate enough profit during the startup or first years of being in business. You should be prepared for those periods prior to starting your new business.
After deciding that you are going to start your own business, your next step should be to begin planning the most basic aspects of your business. The choices you make at this time will also effect the success of your business.
Forms of Businesses
Once you have decided that you will be opening a new business, you will need to identify a business name. The name you choose for your business often is the first impression for a customer. This process is not as simple as it seems. When selecting a name, try to make it a short name, easy to remember, and try to have it describes your business. Remember, you want the customers to know what you do and your name should draw attention to the products and/or services that you provide. Depending on what type of entity (sole-proprietor, corporations, partnerships) you chose to operate the business will determine the extensions that will be required to be used with your name. For example, if you wanted to be a corporation the name would need to identify that you have been incorporated through the Secretary of State that you register you business by using either “Inc.” or “Incorporated” (please review the requirements at the website associated with your Secretary of State website). Although the entity formation is not a permanent choice, it is usually best to determine what type of entity you believe is best during the startup process. If the circumstances of your business change, you can always change the form of your business.
The entity formation process provide several alternatives to choose from. The list below is not comprehensive, but will give you enough knowledge to allow you to do more research.
Sole proprietorship. A sole proprietorship is the easiest and least expensive way to begin operating a business. However, this type of entity form does not protect your personal assets from the claim of business creditors and limits the tax planning options. There are no documents that need to be completed, unless you do not operate under your legal name. The process of using a different name is referred to as “doing business as” and is often a fictitious name that needs to be registered at your local government Register of Deeds. Once you have filed your fictitious owner affidavit with the county clerk, you will need to keep it safe. Make sure you make copies of it, as you will need them to open business bank accounts and for other legal procedures.
Partnership. There are two types of partnerships–general and limited partnerships. General partnerships are risky in that the partners become personally liable for the concerns of operating the business. A limited partner can avoid the personal liability, but loses the ability to become involved in the day-to-day operations and decision-making of the business. To form a partnership an agreement should be drafted between the two or more prospective partners. The agreement can be oral (not recommended), it should be a written and signed contract between all current partners to avoid any conflict that may later arise.
Limited Liability Company (LLC). A limited liability company is valuable for the protection and simplicity it offers the owners (members). It is a flexible form of entity ownership that allows for useful tax planning. An LLC is a hybrid entity that combines the tax flow aspects for sole proprietorship, partnerships, or corporations. The LLC entity form is available in all 50 states and the District of Columbia, but the laws governing the LLC varies from state-to-state. Research your states requirements if this is the entity formation that you are interested in. For federal tax purposes, an LLC is treated and taxed, by default, as a sole proprietorship when there is only one member. With two or more members the default is a partnership, but can elect to be a corporation by filing the IRS From 8832, Entity Classification Election. A multi-member LLC is treated as a partnership unless this election is made to be taxed as a corporation. Because the members will be treated as partners, the members may be subject to self-employment taxes.
Corporation. The corporation form of ownership is the most complicated to start and can require more tax compliance responsibilities, but all the shareholders are protected from liability issues of the corporation. There are tax planning options and strategies that are available to corporations that are not available with other entity formation types. This is one of the most well-known type of business entity forms. Traditionally, corporations are known to have four identifying characteristics: continuous life, organization of management, limited liability, and ease of transferring owners’ interests. The corporation is a separate legal entity and has a perpetual life. The individual assets of shareholders cannot be reached by corporate creditors, unless the “veil” of the corporation’s limited liability is “pierced”. The most common pierce of the veil of limited liability occurs when the shareholders/members do not treat the corporation as a separate legal entity. This entails not keeping the separation the assets, debts, and income. This is commonly referred to as co-mingling assets and funds. As long as you respect this separation, the business entity will continue to be recognized as a separate entity.
The operation and management structure of corporations are usually mandated by state statutes. These statutes should be research thoroughly prior to establishing your corporation, as they are requirements that will need to be maintained in order to keep the entities’ formation through the Secretary of State and maintaining that veil protection.
Registered Agents for Your Business
If you are going to establish a formal entity, you will need to have a registered agent in the states that you have established your business operations. A registered agent is a representative who is authorized to receive legal papers on behalf of your business. Type of documents that are sent to registered agents can include notice of litigation (which are usually documents that initiate lawsuits), important documents sent by the state (such as annual reports or statements), and tax documents sent by the state’s department of revenue/taxation. The registered agent must have a physical address in the state of operation. Usually post office boxes or UPS store mailboxes are not allowed. The registered agent’s address also become part of the public records contained on documentation filed with the Secretary of State. There are private companies that specialize in providing registered agent services for a fee should your business not have a physical location to refer to.
Doing Business Out-of-State
If you decide that you will be performing operations in a state other than the one that you formed your business initially, it must be registered to do so. This process is referred to as a foreign entity in that state. The process is usually straightforward, but it usually requires filing documents and paying fees. Don’t be confused with the terminology “foreign”. Usually when we hear the word foreign we think of something outside the continental United States. In the world of United State corporations and LLCs the word foreign has a different meaning. A foreign entity company means that you are registering your business in another state other than the original state you established your business. An example of this would be you originally registered your company as a corporation with the Secretary of State in North Carolina, but now want to operate in South Carolina. When you apply to the Secretary of State in South Carolina, the documentation that needs to be completed will include the words “foreign corporation”. There are fees associated with these filings and annual reports that are required in that state in order to keep your organization in good standing. So, you will have to maintain annual reports and fees in the original state as well as annual reports and fees in any foreign state that your company is registered.
States are beginning to enforce this registration process prior to allowing business licenses or registering for employment accounts. Some of the common criteria that determines if your are operating or transacting business in another state include (1) having a physical presence in that state; (2) having employees in that state; or (3) accepting orders in that state. While you think that the extra fees and reporting requirements might not be worth your time and efforts, you should reconsider the consequences of those thoughts. You could lose the ability to bring lawsuits in the state courts, which would mean that you would not be able to enforce any contracts established in that state. In addition, your company could be subject to fines and penalties, as well as back taxes, for the period of time you operated your company or transacted business within that state.
Please check out the downloads tab to obtain additional information on state annual reports due dates for business entities.