Starting a business can be a very exciting opportunity. The motivation behind opening a business is different for all. For some, it’s about chasing a personal passion, while for others it allows the ability to not work under someone else. For many the primary reason is to make money!
Whatever the motivation, this is both an exciting and stressful time for entrepreneurs. Before taking those first steps, I strongly recommend you consult with professionals. Lawyers in particular can help you answer some serious questions that will have large implications on your business future. Below we’ve listed some of the major questions to ask a lawyer when starting a business. Please note these are just some of the questions that I’ve personally asked when starting my own business; if other things come to mind, make sure to speak up!
When opening a business there a few different avenues you can take regarding corporate structure. The type of business structure you file will have implications on how you file taxes. Below are the most common types:
Sole proprietorship: A type of unincorporated business in which one person is the single owner who pays income tax on profits gained from the business.[1] Sole proprietorships are quite easy to form due to their low government regulation. This is a common business structure for consultants and independent contractors. With a sole proprietorship, there is no separate legal entity. Therefore, the company’s debts and liabilities are also the debts of the owner. There are many benefits to forming a sole proprietorship in the form of ease of creation, low regulation, and low cost. However, there is also great exposure to risk as there is no wall between the owner and the company.
Partnerships: A formal arrangement between two or more parties to manage and business and share in profits. Partners are responsible for a partnerships liabilities and debts. Partnerships can be beneficial; they’re easier to form and can offer better tax benefits. This is a common business structure for medical professionals, lawyers, and consultants.
Corporations: A corporation is a legal entity that operates as a single entity, separate from its owners. Shareholders enjoy profits from the company but are not personally responsible for its debts.[2] Corporations are similar to LLCs in that they allow the liabilities of the company to be separate than that of its owners. However, corporations are more complex to form and are governed by more than the operating agreement. They also adopt different tax structures depending on the state, file annual statements, and are typically governed by a board of directors.
S-Corps: S-Corp or “small business corporation” passes income directly to its shareholders without paying federal corporate taxes. Shareholders report income and losses on their personal taxes and pay ordinary tax rates. There are however certain eligibility requirements that must be met to adapt an S-corp business structure.
Limited Liability Companies: A limited liability company, also known as an LLC, is another common business structure. Similar to a corporation, an LLC is a separate entity form the owner.[3] One of the major benefits of opening an LLC is that owners are not personally liable for the debts and liabilities of the company. On the downside, LLCs come with more start-up costs and forms which may vary state to state. LLCs also may have to be dissolved in the event of the owners death, unlike a corporation which can live on in perpetuity.
Different business types and structures will require different levels of protection. For example, a literary publication may want to utilize professional liability insurance to protect the company against errors and omissions. Worker’s comp while applicable for corporations, may not apply to sole proprietorships as the likelihood of suing yourself is fairly low. Should you start a business with a proprietary technology, it may be important to you to protect that IP. How you can protect your business is a very important question to ask your lawyer as he/she will be able to identify the risks in your line of work. A small business lawyer can also help you work out which type of insurance is right for your business.
The paperwork you file for your business will depend on the business structure you’ve chosen. Certain structures like corporations and LLCs may require more paperwork upfront. LLCs in particular have different requirements by state. The upfront paperwork is very important as it will set you up for compliance. A good lawyer can help lay out the requirements for how to start your business and will fill out your paperwork.
You may not think this is a big deal, but you would be surprised to know what laws and regulations each state holds regarding business names. I personally went through a fiasco when I had to re-apply for names because my first choice was rejected for being non-compliant with my state’s laws. While the fix just required me to re-file, it was additional time and money spent. Come to the meeting with your lawyer with a few names you are considering. If you choose to sign on with an attorney, he / she can help you sort through which are compliant.
You may have thought that the paperwork headache is over once you get started. However, the truth is that there are a number of filings you must complete ever month, quarter, or year depending on your business structure. Your lawyer should advise you on what has to be filed and when. This may also be a point where it’s smart to hire a good small business accountant. He or she will have the expertise on what forms to file and when.
Starting a business is a great way to bring in extra money on the side or make a complete switch to financial independence. While the US makes starting a business fairly easy in general (at least compared to other countries), there are still a lot of rules and regulations you should be made aware of. Don’t leave these questions open-ended. Consider the conversation with a professional to be an investment in not just your peace of mind, but the future success of you business.
Sources:
[1] Sole Proprietorship. Investopedia. Alexandra Twin. October 30, 2020. https://www.investopedia.com/terms/s/soleproprietorship.asp (accessed June 28, 2021)
[2] Corporation. Investopedia. Will Kenton. February 24, 2021 https://www.investopedia.com/terms/c/corporation.asp (accessed June 28, 2021)
[3] Definition of A Limited Liability Company or LLC. Legalzoom. https://www.investopedia.com/terms/s/soleproprietorship.asp (accessed June 28, 2021)