Farrell: The nuts and bolts of setting up a business
Over the last few years with the struggling economy that has impacted so many, there have been a significant number of people starting new businesses, out of necessity or otherwise. Starting a new business can be extremely rewarding but is not without its challenges.
Prospective new business owners need to have a full understanding of the service or product they plan to offer, but even then, understanding how to set up the structure of the business itself can be confusing and intimidating. Knowing some of the considerations that go into making this decision, such as choosing the correct business entity, understanding owner agreements, and appropriate financing options, are essential foundation points.
Before addressing the logistical steps and the legal decisions that are required in taking those steps, the first need is to determine whether you have a business model or just an idea. A useful definition of a business can be found in Josh Kaufman’s book, "The Personal MBA."
Kaufman writes, “Roughly defined, a business is a repeatable process that 1) creates and delivers something of value…2) that other people want or need…3) at a price they’re willing to pay for…4) in a way that satisfies the customer’s needs and expectations…5) so that the business brings in enough profit to make it worthwhile for the owners to continue operation.”
The proper starting point is to develop a business plan. The business plan should identify vital aspects about the business idea, such as expected revenue, the sources of that revenue, expected costs, and how to market the product or service. Many of the decisions that are mentioned below can be more easily and thoughtfully made if a solid and realistic business plan is put together.
With a well-founded business plan in place, the next step is to consider the nuts and bolts of how to set up the business. Some of those considerations include:
• Name. Consideration should be given to not just whether a name is available through the Secretary of State, but also whether it is confusingly similar to something else and whether a URL is available. Most businesses market, provide information, and/or make sales through a website. The name should be easy to find and remember.
• Entity type. Many new business owners want to shield their personal assets. Multiple options exist of business entities that can provide that protection. The two most prevalent are corporations and limited liability companies (LLCs). The differences between these entity types lie within some of the procedural requirements and tax ramifications, but both offer the liability shield. Several factors will inform this decision, including the number of owners, their citizenship and their involvement in the business, taxes, the possibility of adding new owners or investors in the future, and whether the company is designed to possibly be sold at some point to a private equity or venture capital firm.
• Tax treatment. There are two types of tax treatments available within corporations. A C Corp is where there is tax at the corporate level as well as on distributions to owners, or an S Corp where the corporate tax is passed through to the owners without the corporate layer. As an LLC, you may choose to be taxed as a sole proprietor, partnership, S Corp or C Corp, depending upon the particular situation.
• Financing. In most situations, new business owners need capital to fund their new operation, but look to different options to obtain it. Unless the new business owner has ample assets to invest, common options include traditional bank loans, a loan from a family member, or possibly an investor.
• Owners. If there is more than one owner, a major consideration is how decision making will take place for both day-to-day operations and for major changes to the business. Also, thought should be given to whether to restrict each owner’s ability to sell their ownership interest and what duties each owner has to the business.
For all of these decisions and so many more, anyone considering a start-up business needs to develop a plan for the business and a team of advisers for the logistics. Thinking through the issues ahead of time improves the business’s chances of success immeasurably.
• Ryan P. Farrell is an attorney with Zukowski, Rogers, Flood & McArdle. He can be reached at RFarrell@zrfmlaw.com.