What You Need To Start A Business
Smart entrepreneurs know to surround themselves with people who offer valuable advice and experience that can strengthen their company, and that the first step to making their hard work payoff involves finding a great lawyer, accountant, and other professional.
Choosing a business nameThe first step in starting a business is choosing a business name. The next step is to determine whether the proposed name is available. If the name is available, your attorney will conduct a trademark search to confirm that the name is not registered as a trademark or service mark. If the name is available and is not registered as a mark, your attorney will determine, among other things, (1) whether the name is distinguishable from other business names; and (2) whether the name is likely to cause consumer confusion with, or infringe upon, another's trademark or service mark.
What Legal Entity to FormThe type of entity you form can play a large role in determining the future success of your business, as well as have an impact on your exit strategy. Your options include:
1. Sole proprietor - This type of entity does not enjoy the benefit of the legal distinction between the individual and the business and you are exposed to all of the liabilities running a business entails.
2. Limited Partnership - This is an association of two or more persons who carry on as co-owners of a business for profit. It consists of at least one limited partner and one general partner. The general partners are personally liable for all of the debts and obligations of the business, but the limited partners typically are not. Limited partners may not participate in the management of the business or they will lose their limited liability status.
3. Corporation - This is a legal entity which grants limited liability to its owners, which means, the owners are generally not personally liable for the debts and obligations of the business. A corporation can either be a C corporation or an S corporation.
4. Limited Liability Company (LLC) - This is an unincorporated entity that offers limited liability protection to its members. LLCs can be managed by the members, like a general partnership, or by one or more managers, like a limited partnership. LLCs, and limited partnerships, generally operate with far fewer formalities and enjoy greater flexibility in their business operations and management, than corporations.
Tax ConsiderationsC-corporations are subject to double taxation. The corporation pays Federal income tax on net profits or on capital gains on liquidation; the shareholders pay income tax on any dividends they receive or income paid out to them on liquidation.
Partnerships, LLCs and S corporations are not subject to federal income tax. The profits and losses of these entities flow through directly to the owners ("pass-through" taxation).
The tax consequences of buying and selling LLC and partnership interests is vastly different from buying and selling corporate stock. When you are ready to sell your LLC or partnership interests, the complicated job of determining the basis of these interests necessitate hiring outside counsel and accountants or having a management team well-versed in the tax and financial accounting aspects of LLCs and partnerships. In contrast, the basis for buyers of C corporation stock depends on how much they paid for it, which never changes for as long as they hold the stock.
Costs of Formation and MaintenanceLLCs and partnerships are much easier to operate and maintain than corporations. However, formation of LLCs and partnerships in New York involve greater up-front, out-of-pocket organizational costs than many other legal entities. This is substantially due to New York's publishing requirement. In addition, unlike the majority of states, New York requires the members of an LLC to adopt an operating agreement, and the partners of a Limited Partnership, a partnership agreement.
Raising CapitalFor many startups, the primary source of capital - to start the business and keep it up and running - are loans from debt financers, such as a small business loan. For others, a more expensive source of capital - equity financing - may be the most viable option. The most common source of equity financing for small businesses is friends and family or "angel" investors. Another source of funding is crowdfunding, which is governed by federal and state securities laws. Whereas angel investors or crowdfunding often provide the seed money to get a business up and running, entrepreneurs may seek alternative sources of financing, such as venture capital.