The Fundamentals of Business Formation

Everyone gets excited to start a business whenever a new idea or opportunity arises. But starting a business is easier said than done. A lot of work is needed from planning to organizing, and getting the business registered.

So in this article, we're going to discuss the fundamentals of business and how to set it up the right way.

 The Importance of Business Formation

It's important to make sure that you’re setting your business up the right way. It’s important because it protects you and your business legally. It protects your blood, sweat, tears, and all of the things that you've invested in making sure that your business is set up and functional.

Aside from protection, you can also be awarded funding if your business is structured appropriately. You can apply for grants and different funding opportunities that are available to businesses that are chartered. Charter business is where you would actually go and apply for an organization through your state jurisdiction.

 Which One is For Me? 

Before you even think of starting a business, you should identify first what type of organization you want to build. Below are the four main types of business organizations.

Limited Liability Company (LLC)

What LLC does is that it protects you from being responsible personally for anything your business does. So it protects your personal assets like home, cars, finances. If your business defaults, you're not personally liable. 

LLC is a little bit more flexible in structure. It can be owned and managed by your member which is called Member Managed. It can also be owned and managed by the investors, parent company, and others which are called Manager Managed. LLC's are also the least expensive in terms of upfront costs. 

Limited Liability Partnerships (LLP)

Limited Liability Partnerships are like LLCs except that it may pass some business liabilities to its partners. You and your partners may be personally liable if you engage in misconduct or personally guarantee a debt. 

I personally believe that there are more risks involved with being in the partnership because you could be held personally liable. But you could definitely charter an LLC and have multiple members and just split 50/50 or 30/35 or whatever your percentage will be, but you could definitely charter an LLC and have multiple owners.

Corporations

Corporations provide the highest level of protection against your assets because there's a total separation between you and your business. But a corporation tends to have more work involved. It requires extensive record-keeping, reporting, annual meetings, and operational processes.

It has also more expensive upfront costs but it’s great for businesses that plan to go public or want to sell the company later on. A lot of 6 to 7 figure businesses choose this option as it provides additional tax benefits that may not be available to smaller businesses. 

Difference between C corporation and S corporation

The main difference between C and S corporations is taxes.

The C corporation is the standard (or default) corporation under IRS rules. It pays tax on their income, plus you pay tax on whatever income you receive as an owner or employee.

The S corporation is treated similar to a sole proprietorship or a partnership. It doesn't pay tax. Instead, you and the other owners report the company revenue as personal income and will be filed on your tax returns.

Non-Profit Organizations

A non-profit organization must be set up within your state jurisdiction. Like profit corporations, non-profits require a board of directors, annual meetings, detailed recordkeeping, etc.

Tax-exempt status applies to charitable organizations, social clubs, veteran organizations, religious entities, etc. A lot of people think that when they have a non-profit, they are tax-exempt. That's not necessarily the case. You can have a non-profit and not necessarily be tax-exempt because they're two separate filings. 

There are two steps. So you want to form in your state as an organization, and then later you'll have to apply for organizational status or tax-exempt status with the IRS. You also need to talk to someone that knows about this so that you are processing and filing the appropriate documentation. I see this a lot of times, everybody wants to be a tax-exempt organization but their stuff isn't in order. And so their application is rejected.

How do I get paid if my business is non-for-profit?

You can definitely set up a salary for yourself. It must be approved by your board. So you would have your board of directors approve it first, but you can definitely be paid within your organization. 

 

Setting up your Business

1. Choose your Business Structure

The first requirement of becoming a business owner is choosing the appropriate business structure. It should depend on what you're trying to do and who you're trying to serve. You should know the risks involved and pick what’s best for you.

2. Choose a Name that Reflects your Brand of Products and Services

This is very important. Before choosing a business name or creating a website and getting an email account, you need to check with your state's assessment office to verify if your preferred name is even available. You might spend a lot of time thinking of that beautiful and genius name just to find out that it’s already been used. 

After that, choose a name that reflects your brand. Pick something that identifies who you are. Something unique, something that speaks to your hard work, and being indoctrinated into the products and the services that you’re going to provide to your customers. 

3. Register your business

Now, if you already identified your business structure and your desired name, you can now register your business. 

To start, you need to create your articles of incorporation or organization and upload supporting documentation. You also need to identify a resident agent, someone who can receive mail officially on behalf of the new business. The resident agent has to be a resident of that state.

After that, you have to pay your filing fee. That depends on your jurisdiction. I'm putting averages out between Maryland, DC, and Virginia, that they're around $100 to $300. Now you'll definitely need to pay the fee in order to get your business incorporated and for your certificate of good standing.

4. File for an Employer Identification Number 

The fourth and final step is to get an EIN or Employer Identification Number. Every organization must have an EIN even if it will not have employees. The EIN is a unique number that identifies the organization to the Internal Revenue Service. To apply for it, you should obtain Form SS-4 and its instructions. You can apply for an EIN online, by mail, or by fax.

You also need to know that even if you already have an EIN, it doesn't mean that you're in business. Your business is not official until you've been approved by your state. 

So you need to follow these steps to make sure that you are officially able to do business within your state. And also to ensure that all of your ideas are protected and all of your hard work will remain yours. 

 

Trust the Process

So now that you're in business, with all the things and work you have done, the last thing  I would say is to trust the process.

It might take some time, but to see your name in lights, words cannot describe the feeling. It is super awesome to see your name been stamped with the seal of approval. 

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