Starting Your Own Business
Contemplating creating a small business?
2023 is here and the New Year’s resolutions that you promised yourself on New Year’s Eve are being put to the test. Maybe you promised yourself to take that major step in starting a small business and pursuing your own personal entrepreneurial goals.
We wanted to create a quick overview of considerations that new start-ups may want to consider as you take those first major steps. Business entities is a large and vast topic and there are many entity formations to consider. Here, though, we are discussing this from the lens of creating a Limited Liability Company (also known as the “LLC”).
First, what’s your entity name going to be? You likely want a creative name and something that distinguishes your business and brand from similar competitors. However, don’t be surprised if your ideal name is already chosen. Take a look at the secretary of state’s website and look up the business name to see if it’s already taken. If not, then check online to see if the name is being used for someone’s website. If not, then you are off to a good start. If there is a match, you may want to reconsider the name (and think of an alternative name) to avoid infringing on another entity’s trade-name, trademark, and to avoid confusion in the marketplace.
Second, figure out where your principal place of business is going to be. Where are you operating from? Your home, an office, or from the coffee shop? You need to have an address as that address will be registered with the state when you start your business. Tip: if you are operating solely online, but working from a local coffee shop, DO NOT use the coffee shop’s business address as your principal place of business. The coffee shop will not be too happy when they start receiving your business correspondence. Maybe consider your home address?
Third, what’s your business purpose? If you’ve ever seen Jerry McGuire, Tom Cruise creates what he calls a “Mission Statement.” This is a manifesto for yourself to refer back to when you need a reminder of why you’re doing this. Things get tough, and seeing the passionate declarations that you penned out in the middle of the night may serve as that extra boost when times get tough down the road. Also, when you register your business you’ll need to state your business purpose.
Now, when you register with the state, you’ll need to state your business purpose. This does not mean copying and pasting your lengthy manifesto for the state and the public to see. It means, generally, what your business does. A general example is: “To provide yoga classes for the public in the Commonwealth of Massachusetts.” That’s enough, and that’s all the state will need for your document when you describe your business.
Fourth, who is your resident agent? This is the person or entity that you select to have legal papers served on in the event there is some legal action taken against your company. This can be yourself, your attorney, or one of the many resident agent businesses that are available to choose from. The resident agent would accept a legal complaint on the business’s behalf, and it directs a claimant as to who should be notified should this ever happen.
Fifth, you need to create an operating agreement. This is a legal document or contract that you make with yourself or with co-owners of your business. It spells out how the business will operate. Considerations are:
1. Identifies the owners;
2. Identifies the percentage of interests or ownership in the business;
3. Identifies the capital contributions that are being made by the managers or members to get the business off the ground;
4. Identifies what property the business owns (this means that designated property belongs to the LLC and not you, or your co-owner(s), anymore (note: if it’s a vehicle, then this needs to be retitled under the business);
5. States how income is allocated (what amount goes into an operating account, budgeting for bills or creditors that will need paid, how much is set aside for tax purposes, how much money should be earned before any payment distributions are allowed to be made to the owners and employees);
6. Who is handling filing business tax returns;
7. Who is handling the business’s accounting;
8. Who is handling marketing;
9. How many votes are needed to make business decisions (assuming there are multiple owners, managers, or members), and how their ownership interest factors into how much weight their votes have;
10. Who has authority to act on behalf of the business, and in what capacity;
11. What needs to be considered if the business decides to stop operating and close (who is entitled to what, and how are the business affairs resolved?); and
12. Any other considerations that you need spelled out.
Not every event is foreseeable, thus the operating agreement may need to be updated on an annual basis and signed by the necessary parties as the business enterprise takes on new experiences.
Tip: There are online platforms that offer boilerplate templates to draft an operating agreement. Please be aware that these are very generic and may overlook the unique nature of your business. This is where consulting with an attorney can be helpful as the agreement can be adjusted and tailored toward the unique issues your venture may encounter.
Sixth, do you have investors? Are you taking out a business loan? Your operating agreement may need to take the dynamics of the up-front capital under consideration. Also, if you are taking out a loan you may have to enter into a security agreement with the bank. This means that you, or at the point of entering the agreement and receiving the loan, your business would be putting up collateral (accounts, inventory, business property, etc.) for them to repossess in the event the business defaults or cannot pay back the loan.
Seventh. At this point, it’s time or close to the time where the business is ready to be registered with the secretary of state’s office. In order for the business to truly be an LLC, the business will need to fill out the Certificate of Organization and pay the required fee. After the state approves your application, it will post the paperwork online and the business will be official.
At this point, the business is an LLC. It means that you have limited liability in the event there is a liability issue. But just having a registered LLC does not guarantee you personal legal protection. There is a concept called “piercing the veil.” This means you may lose the limited liability protection if you fail to operate as an LLC.
This is where it is important that you separate yourself individually from the business and operate either just as a manager or member of the entity. Thus, it’s recommended that you create a letter head with correspondence, use a business e-mail address, start a separate business account (do NOT commingle the business funds with your personal accounts), and holding yourself out as the business—not you in your own individual capacity. Because at this point, you are an agent of the business enterprise. You are holding yourself out as a manager or a member of the LLC. These examples of conduct are what solidifies the legal protection.
This is not an exhaustive list, but there are cases out there where people registered an LLC, but never operated under the LLC name. They used their own personal bank accounts for the business, operated under their own name with third parties (never mentioning the business name or LLC), etc. Then when they faced legal problems, they did not receive the benefit of the LLC. The veil was pierced and judgment creditors were able to collect from the at-fault parties’ in an individual capacity (meaning their own personal assets—not just what the LLC would have had). It is as if the LLC didn’t exist, so conduct in how the business is run and how the managers or members who themselves out to the public is absolutely essential.
Eighth, now that we’re past that trap for the unwary, the business needs to obtain a tax ID number, or EIN, from the IRS. This can be done easily online via the IRS’s website. You’ll need the name of the business, personal information from the owners of the entity, the principal address, and a few minutes of your time to obtain this ID number. The business needs to be registered so that the IRS can verify that the entity exists, so make sure the business has been registered and approved by the state.
Ninth, as discussed above, the business will need to create a bank account, or bank accounts (pleural) depending on how the business is structured. The bank will need your business name and EIN to start the accounts that are needed, so be sure to have those available.
At this point, there is an official LLC and your venture is ready to enter the marketplace. This is an exciting time and an experience that can be very rewarding. It will require maintenance, commitment, and accountability to yourself and your co-owners. Also, don’t forget the business will need to file annual reports with the state every year (for a fee) to stay active. If not, the state can administratively dissolve the entity.
Remember, success in operating a small business is done gradually and success comes over time. It’s a marathon, not a sprint, so stay patient. But the patience is worth it.
-Niles and Kyle