Okay, you’ve decided to harness your entrepreneurial spirit and become your own boss. Good for you! Now where do you start?
Most people start simply – what is the business going to do? Some companies sell goods, which are generally physical items such as tables or groceries, but which can also be intangible assets such as websites or cryptocurrencies. Others sell services, such as accountants, doctors, and lawyers. Finally, some offer a mix of goods and services, such as getting a vehicle repaired at a mechanic. The exact nature of the product is important for several reasons, most notably regulatory laws and taxation. Certain businesses, such as casinos or insurance brokerages, must obtain a license from a governmental authority. Businesses that sell services will typically purchase professional liability insurance to guard against the risk that a mistake is made in the performance of that service. For example, doctors and lawyers will often carry malpractice insurance. Companies that sell goods must often get a transaction privilege license, which obligates them to charge tax on most transactions and to then pay that tax to the Department of Revenue.
Having decided on a purpose, the next logical step is to decide on a name. The relevant consideration here is trademark law. In general, you want to stay away from names that merely describe the business. Instead, try to pick something that is unique, yet alludes to the central nature of the business. For example, if you open a hamburger stand, you probably shouldn’t call your business “Hamburgers,” because if your business takes off, you need something in the name that differentiates it from every other business selling hamburgers. Otherwise, customers may get confused and go to the wrong hamburger restaurant. Names like “Sonoran Burger Co.” or “WowBurger” are more unique, and allow customers to more accurately identify your specific burger restaurant. Also, keep in mind that you don’t want to pick a name that is too similar to another restaurant. Usually, you can go to your state’s Secretary of State website to see which business names and trade names are already registered in your state, and often a simple Google search will reveal whether any competitors are currently using a given name.
Next, think about where your business is going to be located. When making this decision, think about liability and privacy issues. Some small businesses can be operated out of a person’s home. But do you really want to put your home address on your business cards and marketing materials? If a customer is upset, do you really want them to know exactly where you live? Also think about how many employees are needed to conduct operations. If it’s a one-person company, that person can probably work out of their home without concern. However, if the business requires several people to operate, and everyone is going to one person’s home to do that work, what happens if one of those people gets injured? Homeowner’s insurance may or may not cover that sort of claim. What happens if there is a dispute about the business assets? When the business is run out of an office, typically its assets are easy to identify because they are often on the business’s premises. But if the business is run out of a personal residence, the business assets tend to comingle with personal assets. That could result in a business owner losing title to those assets, or in some situations, could cause a court to disregard the entity altogether and hold the business owner(s) personally liable. Most businesses opt to avoid these concerns by renting office space and purchasing premises liability insurance for the business location. This is a considered decision that the long-term benefit of a formal office location outweighs the increased costs.
Perhaps the next thing is to decide who the members or owners of the business are going to be. The simplest companies have one sole owner. That person makes all the decisions, puts up all the investment money, and stands to profit if the business is successful. As soon as just one other member is added, the situation becomes a lot more complicated, and many questions arise. Who has authority to bind the business to contracts? Who has the right to use the company bank account? If one member passes away, does that person’s interest revert to the company, or does it go to their heirs? If it goes to their heirs, does that mean the surviving member is suddenly thrust into the position of working with a bunch of strangers? Do those people get to vote on the direction of the company? Or do they just receive the financial distributions that would have gone to the deceased member? All these questions are answered in a contractual agreement called an operating agreement or bylaws. That sort of agreement specifies the exact rights and responsibilities of the various members, and (assuming it is well-written) dictates how the issues set forth above should be resolved. If a business has more than one owner, it is essential to have an operating agreement in place before any disputes arise.
Now, having decided upon the nature, name, location, and owners of the business, you are ready to file the documents that will formally create the business. For limited liability companies, these documents are called Articles of Organization, whereas for corporations they are called Articles of Incorporation. These documents are typically submitted to your local Secretary of State, who will add the company to its list of registered entities.
After the Articles are filed and approved, the next logical step is to go to the IRS website and apply for an Employer Identification Number, or EIN. The IRS has a website that you can use to quickly and easily apply for an EIN, and it is somewhat unique in being the only website this author is aware of that works only Monday through Friday during set business hours. Apparently, the website successfully negotiated its contract to get nights and weekends off. Whatever the reason, upon submitting the application, the website will immediately assign an EIN to the company. It is important to write down this EIN number, and some people save a screenshot as well. You may also be offered an opportunity to download a copy of the EIN assignment letter that the IRS will send out in the mail. Upon receipt of that letter, you can take it to a bank along with the Articles of Organization and the operating agreement to open bank accounts in the name of the business. Thereafter, it is important to use the company’s bank accounts for business expenses, and your personal accounts for personal expenses. The proper consideration here is corporate law, and specifically, the laws that determine when a business should be considered an “alter ego” of the owner, such that there is no legal distinction between them. In order to minimize the chances of finding yourself in an alter ego situation, it is important to maintain a big, bright line between your company’s assets and your personal assets. In practice, this means when the company has made money and you want to take some of that money for personal use, the proper method is to have the company disburse funds to you, either through a direct check or through payroll, and to deposit those funds into your personal account. You can then spend the funds out of your personal account. This helps maintain a strict boundary between what assets are yours personally, and what assets belong to the business. That distinction will be important if the business ever faces liability, because you want the company’s liability to be limited to the company’s assets. You don’t want to place your personal assets at risk by blurring those lines.
If you’ve made it this far, congratulations! You now have a registered company with a distinctive name. You have selected an appropriate office location, secured the necessary permits, opened bank accounts, and you’re ready to make your millions. Just remember the kindly lawyer who got you pointed in the right direction, and feel free to contact us if you need any help along the way.
Christopher Ingle is an intellectual property lawyer with 16 years of experience. Contact GillespieShields at 602-870-9700 to schedule a consultation with him today!
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