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Business Creation
Many business owners have a wonderful idea that offers a solution to a particular problem. Your idea is your passion, and your business is often one of the largest investments of time and money that you will every make.
Which Business Entity is Best?
However, many business owners do not inherently know the best business entity (LLC, C-Corporation, Partnership, or S-Corporation) to help them fulfill their goals. Many do not know, for example, that they can have an LLC for administrative and state purposes while it also being an S-Corporation for federal tax purposes.
The decision on the correct business entity is an important first step to create your business. However, it is only the first step of many. I can help you take the remaining steps. For now, let’s review some of the most prevalent business entities.
LLC’s
Limited Liability Companies are incredibly popular and powerful business entities. They have a simple management structure, often have positive tax implications, and provide liability protection.
Management of an LLC
Every company requires some for of management. However, LLC’s have relatively simple management structures. You need to first decide if you, as the owner (or “member,” as you are called) want to manage the LLC, or if you want to hire a non-owner to manage the LLC. This decision can have an impact on how your LLC is managed. Beyond this decision, you will need to decide on the details of your Operating Agreement, which governs the management of your LLC.
Taxation as an LLC
LLC’s are often taxed as pass-through entities, meaning that you will not have to pay corporate tax as well as personal income tax. Rather, you are only taxed once on income that comes to you. This allows you personally and your business to have more money and be on more secure financial footing.
Liability Protection as an LLC
The liability protection that LLC’s provide shields you personally from any liability that arises from the business. For example, if someone becomes injured on your property and they suit you, they cannot make you pay personal funds or sell your home to pay damages for that injury. This protection also shields your LLC from any liability that arises against you personally.
However, you need to know that there is a legal doctrine that allows this shield to be pierced in certain situations. Good planning and legal advice is necessary to avoid this situation.
Corporations
Corporations are the most famous business entities in America. The most well-known companies in the United States are corporations. Corporations are excellent business solutions for larger companies, and may be the best solution for your small business.
C-Corporations
C-Corporations are the best-known form of corporations, and they allow for sophisticated business governance that can grow with your business. They are run by a executive, which are overseen by a Board of Directors. They allow for a variety of ownership forms and structures and can be a viable option for your business while it is both small and large. One negative of C-Corporations is that they are subject to “double taxation,” which means that both the company and employees, executive, and shareholders are taxed on income.
S-Corporations
S-Corporations are a unique corporate structure. You can form your company as an S-Corporation from the beginning, or you can make an S-Corporation “election” using the IRS Form 2553. You would do this when you form an LLC, and you can elect to be taxed as an S-Corporation for federal tax purposes. Some of these tax benefits include the fact that S-Corporations are not taxed on their income (and so are not subject to the “double taxation” of C-Corporations), but owners are taxed on their proportion of the company’s profits. When applicable, S-Corporations are not subject to self-employment taxes. You must be aware that there are some potential issues that arise from S-Corporation taxation, which will be discussed if you believe that an S-Corporation may be right for your business.
S-Corporations do have restrictions on who can own stock in the corporation. There may only be 100 or less shareholders, shareholders must be U.S. citizens (a revocable living trust is allowed), and other companies generally may not own stock. A S-Corporation may hold stock in a subsidiary S-Corporation, known as a Qsub. These restrictions may determine if forming an S-Corporation is right for your business.
Setting Up Your Business to Succeed
Business creation is not solely about choosing the correct business entity and making the correct filings, but is also about setting up your business to succeed. This type of planning includes filing for an Employer Identification Number, setting up bank accounts, drafting Operating Agreements or Bylaws, employment contacts, ownership certificates, vendor contracts, employee manuals, and other documents.
Starting your business includes the development and drafting of sound policies and procedures that are repeatable as your company hires and expands. You also need to consider bookkeeping and accounting services, and whether you want to do this on your own or have a professional do it. This planning is comprehensive and allows for you to focus on making your business profitable and providing solutions to problems.
Operating Agreements
Operating Agreements are the governing documents of LLC’s, and are an essential part of the formation of an LLC. While you are in the process of forming your LLC, it is important for you to also develop an Operating Agreement, especially if there are more than own member of the LLC. If you are a Single Member LLC, an Operating Agreement may be important for financing purposes, or to establish some form of succession plan (though a Buy-Sell Agreement is better). However, there are more than one member, it is especially important that you negotiate the details of the Agreement while forming the business and you are on the same page. Waiting until there is tension makes it more difficult to decide on the provisions within the Agreement. The decision to work with a business attorney can help you through this process.
Starting your business includes the development and drafting of sound policies and procedures that are repeatable as your company hires and expands. You also need to consider bookkeeping and accounting services, and whether you want to do this on your own or have a professional do it. This planning is comprehensive and allows for you to focus on making your business profitable and providing solutions to problems.
Part of an Operating Agreement
Operating Agreement delineate percentage of ownership, capital contributions, voting and management rights, the purpose of the business, governing laws, amount and types of shares, and many other important factors. These pieces work together to create a comprehensive governing structure for your LLC and allows for a smooth ownership of your business. As there are so many different moving parts in an Operating Agreement, working with an attorney can help you identify and address all the important topics.
How an Operating Agreement Helps You
A correctly organized and drafted Operating Agreement offers you structure and protection while you run your business. It can prevent problems from forming, and can help resolve any problems that do arise. It is important for you to have an Operating Agreement in the beginning of the business and while all owners of the LLC are on good terms, as that is the best time to arrive at a consensus for best practices.
While your clients will never see your Operating Agreement and it is not a product that you sell, your Operating Agreement is an essential part of your business and will allow you to focus on making your business profitable.
Bylaws
Bylaws are the governing documents of corporations. Bylaws are agreed upon by all the owners of the corporation and dictate how the business is run and governed. They are powerful documents that can protect the business and its owners from contention, litigation, and liability.
It is important that you work closely with any other owners of your business to arrive at a common goal and to engage good legal counsel to address the possible issues that you may confront while you run your business. Running a business is complicated and difficult, and having appropriate bylaws will help your business be successful.
Bylaws address topics such as the amount and type of shares, the identities and roles of directors and officers, shareholder voting rights, Board of Director voting, the purpose and term of the business, taxation matters, dividends, conflict resolution, and other matters. It is indeed the document that governs how your corporation is generally to be run. While you may develop policies and procedures that detail how your corporation will run on a daily basis, the bylaws guide and govern your corporation as a whole.
What Will Happen If You Do Not Have Bylaws
If your corporation does not have bylaws, Colorado statutes will govern how your corporation will be run. While adequate, these statutes may not be the best fit for your corporation or address your unique situation and goals. It is important that you develop bylaws that are best for your corporation and place your corporation in the best situation to succeed. Negotiating with any other shareholders of the corporation on the bylaw provisions will increase your unity and knowledge of how your corporation is structured.
I can help you choose the business entity that is appropriate for your situation and help you with everything else that you need to help start your business. If you need non-legal services, I can connect you with the professionals who are committed to helping you and your business succeed.
Starting your business includes the development and drafting of sound policies and procedures that are repeatable as your company hires and expands. You also need to consider bookkeeping and accounting services, and whether you want to do this on your own or have a professional do it. This planning is comprehensive and allows for you to focus on making your business profitable and providing solutions to problems.
Part of an Operating Agreement
Operating Agreement delineate percentage of ownership, capital contributions, voting and management rights, the purpose of the business, governing laws, amount and types of shares, and many other important factors. These pieces work together to create a comprehensive governing structure for your LLC and allows for a smooth ownership of your business. As there are so many different moving parts in an Operating Agreement, working with an attorney can help you identify and address all the important topics.
How an Operating Agreement Helps You
A correctly organized and drafted Operating Agreement offers you structure and protection while you run your business. It can prevent problems from forming, and can help resolve any problems that do arise. It is important for you to have an Operating Agreement in the beginning of the business and while all owners of the LLC are on good terms, as that is the best time to arrive at a consensus for best practices.
While your clients will never see your Operating Agreement and it is not a product that you sell, your Operating Agreement is an essential part of your business and will allow you to focus on making your business profitable.
FAQs
How do I form an LLC?
To form an LLC in Colorado, you need to first file Articles of Organization with the Colorado Secretary of State, and then file for an Employer Identification Number with the IRS. While these are steps that can be done on your own, I would advise you to discuss starting your business with me beforehand to develop a comprehensive strategy.
What are the steps to create a business?
Forming an LLC and Corporation are relatively similar. You need to file your business with the Colorado Secretary of State and also receive an Employer Identification Number with the IRS. You should also draft an Operating Agreement for an LLC or Bylaws for a Corporation and issue Membership Certificates for an LLC or stock for a Corporation. There are other documents that you should also develop, such as policies and procedures, contracts, employee manuals or Independent Contractor Agreements, and others.
What considerations to I need to have to decide if I can successfully start a business?
You have two overarching considerations, that is are business and legal considerations. For the business considerations, you need to look objectively at your business idea, business development plans, investments, capital, management, and other factors. You must be able to objectively see a roadmap to profitability. For the legal consideration, you need to make sure that you have selected the best business entity properly filed your organizational documents and received an Employer Identification Number, and drafted the most appropriate management and ownership documents. As a business law attorney, I can help you with these considerations.
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