The Basic Legal Structure of Forming Your Business

Starting your own business involves addressing several basic legal issues.

Choice of Business Entity

          How will your business be structured?  Most businesses starting out usually fall under one of four designations: (1) sole proprietorship; (2) corporation; (3) partnership; or (4) limited liability company (or LLC).  However, there are a myriad of choices and sub-designations to choose within these basic choices due to type of industry, membership make-up, tax ramifications, etc.  That’s why it’s good to engage both a CPA and an attorney specializing in business law early-on in the process to help you navigate these issues.

Filing Appropriate Documents with State & Local Governments

          Once you’ve chosen your business entity, you will want to file the correct documents with the locality where your business is headquartered as well as your state.  Your choice of entity will usually determine what types of documents need to be filed.  Also, the type of work or service you plan to provide can involve additional licensing requirements with the government.

Obtaining an EIN from the IRS

          If you want your business entity to have a separate tax designation from you or you don’t want to use your social security number as the tax designation for your business, you will need to obtain a Federal Employer Identification Number (or EIN).  The good news is it’s become fairly easy to obtain this number for free on the IRS website.  Once obtained, this number is what is used to identify your business for all of its tax filings.

Establishing An Operating Agreement for Your Business

The type of operating agreement you have drafted depends on the type of business entity you have chosen.  This operating agreement is the contract between the business owner or owners on how the business is to function and be managed. This agreement should also address contingencies and sudden events that may arise during the lifespan of the business, such as adding new owners or current owners retiring or dying.  It’s critical to retain an attorney specializing in business law to draft such an agreement early on after the above-mentioned steps have been completed.  Having such an operating agreement in place before something major happens can be critical in sustaining the business through a crisis.  Also, you usually need such an operating agreement in place if your business needs to obtain a commercial loan from a bank or similar financial institution.

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