So, you decided to start your own business? Congratulations! This checklist will help make sure you haven’t missed anything before you get to work. In this checklist, we will look at the steps you should take before offering your products or services. All of the following are important to think of as part of setting up your business. So often essential steps are left until later, but waiting can create pitfalls you cannot overcome. So, let’s start checking off that list!
Select Your Entity
Before starting a business, you need to consider what type of entity you want to be. By not making the decision you are already choosing one of two options: Sole Proprietorship (just you) or Partnership (working with others). If you want to be ahead of the game, consider limiting your liability with one of the options available for your new business.
To Limit or Not to Limit?
Limited Liability is a phrase you hear often in the startup world. But, why do you need to limit your liability? What could possibly go wrong? What is limited liability anyway? For our purposes here, limited liability is important as it can be the difference in going down with the ship or finding a life boat. When you start your own business. Especially if it is also your livelihood, you are putting your blood, sweat, tears and money into the business. If you get sued and lose, your creditors may take everything you have out of your personal life. That is, of course, if you neglected to limit your liability. Liability is what you owe someone – creditors, vendors, claimants in litigation. You want it to be limited to the money you have in the business, or the assets you have put in the business. This is not a way of being sneaky or underhanded, but a way of keeping the money you have earned, and the money of those closest to you. Owners of a business want to be protected from lawsuits and want their investment to be limited to what they put in the company. Limiting liability is important for many people involved in a startup business:
- Entrepreneurs – Put their heart and soul into a new business idea. They do not also want to sacrifice their house, car, retirement account, or first born child to someone because of a business mistake.
- Investors – Have a lot to lose if a startup gets sued. They would be the “deep pockets” if the business couldn’t pay a judgment.
- Family Members – Business owners work very hard to make a living. If they do not limit their liability, then their spouse, parents, or children could be harmed by a lawsuit against the business. Any jointly held assets could be collected to satisfy a judgment.
- Lenders – If a family member or friend loans you money to start up your business, and they are supposed to get paid back when you make some money and you do not have any liability protection for your startup, your friend could be called your business partner, and could be subjected to liability for loaning your startup money. Especially if you do not have the loan documented appropriately.
I can’t tell you how many startups want to get started without the “hassle” of selecting an entity that offers limited liability. They figure, they will handle that when they make some money. This is similar to avoiding the purchase of health insurance until you discover you have cancer. You cannot prevent everything if you protect yourself from liability after you begin.
Why would you not want limited liability protection from a business entity? If you are working virtually, with no assets for your business. You never plan to physically see your clients. You are providing very inexpensive services. Your services are short-lived. You personally do not have any hard assets (house, car, retirement plan, etc). I would contend, it is the rare business that has nothing.
Different legal entities can be used for different purposes.
Over the years, different types of entities have been created to fill a need perceived by the business community. At first, the only way to secure any kind of liability protection was to incorporate (form a corporation). The problem with incorporation was that it was so expensive and often cost prohibitive. Many startups decided to be partnerships or operate as sole proprietors as it made more sense to forego the expense and headache of incorporation than to have the protection against a lawsuit that might never happen. Now, there are many ways to protect yourself from the liabilities of being in business without the expense and complexity of incorporating. The following is a list of those entities:
- Limited Liability Partnership
- Corporation (S Election)
- Nonprofit Corporation
- Limited Liability Company
Selecting an entity can be difficult. It is important to take this task seriously. We offer options to help you make this determination simpler.
Form Your Entity
So, you decided to form an entity. Where to begin? The formation of a legal entity gives that idea, that business model an identity. It will take on a life of its own and begin to grow. So, where do you begin once you have decided.
In Alabama, you need to reserve the name you want before you can form an entity. Your name cannot be the same or confusingly similar to another name already in use in the state.
To form an entity, you need to draft an organizing document. For an LLC this is called the Articles of Organization. For a Corporation, this is called the Articles of Incorporation.
Filing with Probate Court
You must file the Articles in the Probate Court of the county where your initial registered office will be located.
This is like the Social Security Number for your business. You can file for this online at the IRS website. If, however, you already have an entity that received its FEIN online, you have to apply a different way.
Perhaps one of the most important parts of an entity. If there are any partners in the business, this defines the relationship. It is important to think through the important elements of governing documents while things are good. Especially, the breaking up parts.
This is part of the governing documents, but may be separate. This can include how you agree on the sale of a business or how you “fire” a partner who works in the business. It is important to document all agreements between the owners. The most common of these documents is the Buy-Sell Agreement.
If you borrow money or want to take money in exchange for ownership in your company, you need to make sure everything is documented appropriately. Debt and equity are both legitimate types of investment, but you need to make sure everything is documented appropriately. If you don’t take it seriously, all of the work you did to protect yourself could go away. Once you have everything together, don’t forget to sign the documents!
Now that you have formed your entity, you need to make sure you have permission to operate. You need to look into the following before beginning anything:
Business Privilege Tax
In Alabama, the Business Privilege Tax is required of every business that exists. It is an annual tax due each year. When you start a business, the initial return (called the BPT-IN) is due two and a half months after the business has formed. This is important, as currently (due to delays in filing) the tax is due before you receive any information on the tax. Make sure to file your BPT-IN within two and a half months of formation of a new entity.
Most cities, counties, and states require some version of license to operate. Typically, the license is based on what type of business you have. This information is normally available on the City or County’s website. Alabama’s license is typically sold through the county probate court when you purchase your county license. If you go to your customers or deliver your products, you need to check your delivery area.
If you are building anything, you need to have a permit to do so. Typically, your building contractor will handle this. Whoever handles it, you need it before you begin.
Your office space needs to be zoned for your type of business. Check the zoning before you jump in to a lease or try to use space you already have.
Doing business outside of your state?
If you are going to operate outside of your state, you need to register with the foreign state to do business.
Get Ready to Work
Before you begin working with clients or selling your products, you need to think about the legal relationships you will have with people (or businesses). Simply limiting your personal liability from litigation is not enough, you need to make sure to protect your business from lawsuits as well. To do this, you need to think about how you will interact with people. Different types of relationships can be:
- Independent Contractors
- Customers or Clients Suppliers
- Strategic Partners
Each of these relationships has a different legal relationship with different rights and obligations for you. Documenting your relationships can be important. Think about the types of things you need to protect:
- Trade Secrets
- Intellectual Property
- Business Ideas
Think about who will have access to the various information. Then make sure you have something in writing to protect yourself. Are you going to provide services or offer payment options for your products or services, do you want to charge interest, collect attorneys’ fees if you have to go after your customer or client. Those things need to be in writing. Are you going to have Independent Contractors create intellectual property for you (code, ghost writing, artwork). If you want to own that intellectual property, you need to make sure that is in writing.
Written agreements help to protect both parties. You are not doing anyone a favor by making handshake deals or not putting agreements in writing. If something happens to you or your business, you want to make sure that those you worked with are protected in the best possible way.There are a number of legal documents out there that help to describe certain relationships. The important thing is to document your relationship in the beginning. Starting a business is more than simply forming your entity, but ignoring the formation of an entity to protect your investment could have devastating consequences.
TIRED YET? We Can Help You Out!
Starting a business is a very exciting time. It is important to set everything up correctly in the beginning. This checklist should help you get started on the right foot and protect your business idea. This is the first step toward making your new business successful and protected.
Still have questions? Schedule a Consultation!
Want to try it yourself? Check out the information at Legal to English!