25 Jan How to Start a Business
How to Start a Business
This article serves as a guide on how to start a business. The article sets forth the critical issues to consider, and the essential steps to take, in starting a business. With that said, please remember that each business is unique, and your particular business may require additional steps not mentioned in this article, especially if your business will have more than one owner, you will have outside investors in your business or you will have employees at the outset.
Step 1: Choose a Corporate Entity
First, unless you want to operate as a sole proprietor, you’ll want to choose a corporate entity — this is what is commonly referred to as “incorporating” a business. Possible corporate entities include a limited liability company (“LLC”), corporation (S corp or C corp), general partnership, limited liability partnership (“LLP”) or limited partnership (“LP”). Also, a new type of corporate entity altogether is the benefit company.
LLCs are the most popular form of corporate entity, particularly for small businesses. Before selecting an entity, you’ll want to discuss the options with your lawyer and accountant. This article explains more about choosing a corporate entity.
Step 2: Incorporate
Second, you’ll want to formally incorporate the business by filing the necessary paperwork with the secretary of state’s office in the state in which your business will be located. If your business will be an LLC, you’ll file articles of organization; if your business will be a corporation, you’ll file articles of incorporation. (Some states use variations of these names.)
General partnerships are less common than LLCs and corporations. To form a general partnership, you do not need to file any such articles with your secretary of state’s office. Rather, the law deems partnerships to be formed automatically upon the occurrence of certain factors, the most important of which is the sharing of profits by two or more persons.
LLPs and LPs are also less common than LLCs and corporations. Only “professionals” may form LLPs. The term “professionals” typically includes accountants, architects, lawyers, chiropractors, dentists, landscape architects, naturopaths, nurse practitioners, psychologists, physicians, podiatrists, radiologic technologists, and real estate appraisers. To form an LLP, an eligible general partnership must file an application for registration as an LLP with the secretary of state’s office. LPs, meanwhile, are formed by filing a certificate of limited partnership with the secretary of state’s office.
Regardless of the type of entity you select, most often you will want to formally incorporate your business in the state where your business will be located. An exception to this rule occurs if you form a business with the expectation of seeking outside funding from angel investors or venture capitalists. Most of these investors will want you to incorporate as a C corporation in Delaware, because that state’s corporate laws will be most favorable to those investors, and C corporations are the best corporate form for businesses that want to eventually go public.
Step 3: Draft the governing document
Third, you should draft the business’s central governing document. This document will set forth the rules and guidelines about how your business will be operated. If you formed a corporation, this document is the “by-laws;” if you formed an LLC, the document is the “operating agreement;” If you formed a partnership, the document is a “partnership agreement.”
If you do not draft such a document, your business will be governed only by the default laws of the state in which you incorporated. You may not want all of these laws to apply to your business. Another advantage to drafting a governing document is that it reinforces that you have created a separate legal entity independent from your own personal affairs. This is important because it further establishes that your personal assets should not be subject to the business’s debts and obligations.
Step 4: Draft minutes or consents
Fourth, if you formed a corporation or an LLC, you’ll want to hold an initial organizational meeting. During this meeting, the business will adopt the by-laws or operating agreement, appoint officers, elect a board (if necessary), convey property and/or assets to the business and issue shares or interests. All other initial administrative tasks also should be taken care of at this meeting.
In the case of a corporation, you will memorialize these actions in a document referred to as the “minutes;” and in the case of an LLC, the document is referred to as the “consents.”
Step 5: Other filings
Fifth, unless you will be operating as a sole proprietor or you will be operating a one person LLC and elect to be taxed as a sole proprietor, you will want to obtain an employment identification number from the IRS (“EIN”) and the equivalent tax identification number from the state in which your business will be located.
If your business elects to be taxed as an S corporation, you also will need to make the necessary filings with the IRS. On a related note, a common practice these days is to form an LLC and elect to be taxed as an S corp. This allows the business the flexibility of operating as an LLC while receiving the benefits of S corp taxation.
Step 6: Other miscellaneous considerations
Last, you should follow up with your accountant and lawyer to ensure that all legal steps have been addressed. Because your business will be unique–each business is unique, after all–there may be additional legal documentation that will be required. Here are some examples:
– Buy-sell agreements (These are essential in the case of two or more owners.)
– Licensing requirements (Most states and local jurisdictions require specific licenses for each type of business.)
– Securities registrations or exemptions from registration (You will need to comply with federal and state securities laws in the case that you have outside investors.)
– Employment agreements and employee handbooks (These are critical if you will have employees at the outset, especially executive level employees.)
– Intellectual property agreements, such as noncompete agreement and non solicitation agreements (Again, these are critical if you have executive level employees at the outset and have valuable intellectual property to protect.)
– 83 b election filings (This filing should be made in the case your business will be issuing restricted stock to employees.)
If you need legal assistance in starting a business, or would like to learn more about how to start a business — especially if your business will be in or around Portland, Oregon — please contact us.
Author: Andrew Harris
To continue reading more about the laws that might affect your business, including other articles explaining about how to start a business, particularly in or around Portland, Oregon, please see the Articles page. Or, to simply see a list of helpful legal resources for Oregon startups and businesses, please see the Legal Resources page.
If you need assistance with a particular legal issue affecting your business, please contact us and we will get back to you as quickly as possible.