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A To-Do List for Entrepreneurs
I think it was some high school teacher of mine that used to say, "Failing to plan is planning to fail." Of course, back then, those words fell on the deaf ears of a teenager. Only now, after many years as a corporate attorney, have I found myself repeating the statement myself to clients. Starting a business is not a "fly by the seat of your pants" venture. That is, at least if the business is intended to be a successful one. There are some common steps that every entrepreneur must take to get a business up and running. While not fully inclusive, the following checklist is a good place to start.
Establish a business plan
A business plan should contain information on how the business will go from an idea to the real thing. While there may be many details that are not nailed down at the initial stage, there should be a general sense of development, financing, and operations.
Name the business
Most business owners already have a name in mind for their entity, but when it comes time to register the company, the state will require that the entity name is not already being used by another company. Moreover, there may be certain laws regarding what conventions can be used. For example, the state may require a corporation to actually contain the abbreviations "corp." or "inc." for identification purposes. It also may be wise to protect the business name with the filing of a trademark or trade name.
Choose the business entity
Will the business be organized as a sole proprietorship, partnership, limited liability company, or a corporation? This is a very important decision as it will affect tax structuring and personal liability. Once the entity is chosen, the Secretary of State will require certain documentation.
Obtain an EIN and state tax ID
An Employer Identification Number ("EIN") is assigned by the IRS. The number must be used for tax filings, reporting purposes, setting up business tax accounts, and employee tax withholding. The state in which the company is organized will likely require a tax ID as well. For example, if the company will conduct business that requires it to collect and remit sales tax to the state, you will need to obtain a sales tax ID number.
Draft the organizational documentation
Maybe the most important early step in the life of a company is getting the organizational documents right.. The type of document needed depends on the entity structure. If it is an LLC, an operating agreement will be used; a corporation will rely on shareholder agreements and bylaws; a partnership will need a partnership agreement. No matter what the document is called, its purpose is essentially the same - to define each owner's individual financial and managerial rights and responsibilities in relation to the company and to the other owners. The organizational document may contain provisions for the tax treatment of company income, restrictions on each owner's ability to sell or transfer ownership interest, and important protections for minority owners.
Obtain a business bank account and insurance
This is a no-brainer. Company assets must be maintained separately from personal assets. Commingling company and personal assets can result in the owner losing the protections from personal liability that are an important part of a corporation or LLC. The federal tax ID will be needed to set up an account. Once established, the business bank account should be used to process credit cards, checks, or take out a line of credit for the business.
A business should not open its doors without being properly insured. The kind of insurance needed will vary, but maintaining insurance can provide peace of mind and save costs.
Obtain required licenses or permits
Zoning, environmental, fire code, sanitation...the list of possible licenses or permits that may be needed is extensive. Check with the Secretary of State to see what will be required. Skipping this step is the fastest way to get your business shut down before it even really starts.
Keep in mind these are just the first few steps. Opening a business requires a much more extensive to-do list. If you need help facilitating the formation of your business, contact the corporate attorneys at McBrayer, McGinnis, Leslie & Kirkland, PLLC. We can assist in all of the above, as well as the other decisions that should be made before the "Open" sign is hung in the window.
Thomas D. Flanigan is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Flanigan specializes in the areas of entrepreneurial business, lending and commercial services and mergers and acquisitions. He can be reached at email@example.com or 859-231-8780, ext. 1211.