Basic Business Cents
Homework for Starting a Business
Part IV-Make It Legal
by Lou Schultz, SCORE counselor
Original publish date 08/2010 (#44)
In the previous articles, you have thought through whether the new business is good for you, whether the product/service and market is real, and taken a good look at the financial projections, and researched the best source for needed funds. The next step is to legalize the entity. Factors to be considered include liability protection, taxes, and administration simplicity.
The first step is to decide what form of organization is best for you. A helpful resource is a book, A Guide to Starting a Business in Minnesota, which is updated annually. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, 1st National Bank Building, 332 Minnesota St., Suite E200, St. Paul, MN 55101-1351, telephone (651)-296-3871 or 800-310-8323, fax 651-296-5287. Professional advisors are always helpful but the options and some of their advantages and disadvantages can be addressed here.
|Simple to organize||Owner must make all decisions|
|Owner is the business||No separate legal status|
|Owner receives all profits||Unlimited liability|
|Fewer legal restrictions||Limited ability to raise funds|
|Easy to discontinue||24X7X365 responsibility|
|Owner taxed on net income at individual rates|
|Easy to organize, but draft an agreement!||Significant individual liability—any partner can be held liable for business debts|
|Separate legal status||Divided authority|
|Uses skills and resources of all partners||Exit of one partner may dissolve partnership|
|Can leverage greater financial strength||Written partnership agreement is crucial!|
|Partnership generally not taxed, partners taxed pro rata at individual tax rates||May lose friendship of partners|
CORPORATION—"C" OR "S"
|Limited liability for owners||More complex to organize; more expensive|
|Perpetual life||Charter may restrict types of activities|
|Easy to transfer ownership||Must observe legal formalities, or owners risk liability|
|May be easier to raise capital||More difficult to dissolve|
|May have more efficient management||"Double taxation" of "C" corporation and shareholders|
|Adaptable--large or small organizations "S" corporation limitations|
LIMITED LIABILITY COMPANY (LLC)
|Same protection from liability as corporation||More complex and expensive to organize|
|Tax treatment like partnerships||Must observe legal formalities or owners risk personal liability|
|Flexible—operating agreement governs||Fairly new entity; law is developing and varies from state to state. May impact multi-state operations|
|Unrestricted as to number and types of members|
Regardless of the form you choose, use professional advisors, observe the formalities, keep business and personal records separate, and sign documents in authorized legal capacity.
Choose your business name carefully. Consider a name that is descriptive of your business and easy for customers to remember. Some say a two-syllable word beginning and ending with a harsh sound is the easiest to remember. You may need to file the name with the Secretary of State and will want to research possible conflicts. You should also register your domain name at the same time for future use with a web site and other social network marketing.
You will want to get Tax ID numbers; Federal Form SS$ filed with the IRS and Minnesota filed with MN Department of Revenue. The filings can be done on-line and there is no fee to file. Business licenses, federal, state, and local may be required for some businesses. State licenses are listed on-line at www.state.mn.us under License Minnesota.
This article is intended to be a guide for your preliminary thinking but is in no way a substitute for advice from an attorney and/or a certified public accountant.