FAQ - Small Business Owners

Before starting:

Why do I need an entity?
The first reason to form an entity is to put a separation between personal and company assets. A company is a person, and it owns its own assets. A lawsuit will be brought against a company as an entity not against an individual. The reverse is true if you operate as a sole proprietor: there is no shield to protect your personal assets because there exists no barrier, no separation between you as a person and the business you run as sole proprietor. In other words, one of the reasons to form an entity is to avoid personal liability. Lastly, tax considerations are factored whether to form an entity or not: these can be reduced by forming an entity.
What are the different types of entities and how do I know which one is the best choice for me?
In United States, generally, one can choose one of the following entities: sole proprietor; general partnership, limited partnership, limited liability partnership, limited liability company, and a corporation that can be an S - Corp and a C-Corp. Depending on your situation you will need to speak to your legal advisor to determine what choice of entity is best for you.
What is the difference between an LLC and C- Corp?
They differ in many ways from the way they are organized, their structure, their tax structure, the formalities that members of an LLC (limited liability company) and shareholders of a C- Corp (a corporation) need to follow. For example, the formalities of an LLC are more relaxed compared to the formalities a corporation must follow.
What is the difference between a C- Corp and a S- Corp?
There are three main differences between these entities: shareholder rights, ownership, and taxation of the entity. A C- corp can have different classes of shareholders, whereas a S - Corp can have only one class of shareholders. From an ownership perspective, an S-Corp can have up to 100 shareholders all of which must be U.S. citizens or permanent residents, a C-Corp, on the other hand, can have an unlimited number of shareholders some of which may be foreign persons. Lastly, taxation of a C-Corp pays taxes at the corporate level, hence double taxation, an S-Corp pays taxes as an LLC, as pass through entity (a pass through entity is one where profits flow through to owners and are taxed under the individual income tax.)
What is a buy-sell agreement? Why do I need one?
A buy-sell agreement is a binding contract between members of an LLC or partners in a partnership that provides what will happen to the business should one of the members of the LLC or partners die or no longer wishes to be part of the business. It also restricts the entrance of new members or partners. In other words, through a buy-sell agreement business owners of a company control how things will be in the event of a fall out or someone dies.
What problems can I run into when choosing a name for my business?
1. It can be in prior use by another company
2. Domain issues when registering your domain to then create a website. If you’re infringing you may receive a call to take down your website.
3. You cannot register your company if it is a restricted name, i.e. names a state has deemed not to be used to name an entity. In the same line of thinking you can decide if you want to protect your name by applying for a trademark it.
Can I start a company if I’m still employed?
It depends on a set of factors. Without presenting an exhaustive list the following are some questions you need to consider. Is it similar to that of your current employer? Do you have any restrictions in your agreement that would prevent you from starting a business? If so, are those restrictions legal? Can you talk to your employer to receive their support to start? Therefore before deciding to start a business while employed first consider what are the best venues to take, the language of your employment agreement, and speak to an attorney to decide the best course of action if you’re going in a line of business that will compete with your employer.
What legal requirements need I know when starting?
1. Where applicable licenses to do business. These can be renewable yearly.
2. You’ll need an EIN - Employer Identification Number.
3. You’ll need to file your annual report statement.
4. Taxes - state and federal taxes as applicable.
Should I pay a service for a registered agent?
It depends. First, thought, a few words on the role of the registered agent. An entity when formed must identify a registered agent and that agents address. This person or service provider will receive important communications about your company. For instance, notice of lawsuits, communication from state and federal agencies, tax notifications, any official documents or notifications on behalf of the company. You can be your own registered agent if you’ll operate in your state and you want to oversee all notifications related to your company yourself, or you can engage the services of a registered agent. If, however, you’ll do business in other states it is best to engage the services of a registered agent in the state you’ll do business.
What about contracts? What contracts do I need to start?
When working with your attorney there are several decisions you will need to make based on your business and the structure of your company. If you will work as a company’s employee, you will need an employment agreement. Next, you will do business with your customers and vendors, you will need contracts that would govern those relationships. If you are leasing, you will need to understand the lease. If your business includes intellectual property that you need to license, then you will need a license to do so. You will need contracts for major transactions. If you will hire a website developer, you’ll need to have contract in place too. You will need a privacy policy for your website as well. Lastly, the nature of your business will dictate the type of contracts you will need to begin.
When should I think about succession planning?
Today.
Can I still be personally liable even if I form an entity?
Yes. You may still be liable if you don’t observe some of these requirements: a. sign on behalf of the company and not on your personal capacity; b. don’t commingle funds; c. don’t use your company as an alter-ego; d. avoid where possible personal guarantees; e. stay compliant - observe the law; f. don’t break the law - i.e. do wrong; g. don’t forget formalities; h. make sure your company is well funded.
What is IP?
IP stands for Intellectual Property. The best way I can describe with a very broad brush is this: Intellectual property is a property right a creator has in his or her creation. It is a right upon which others cannot infringe. Intellectual property law makes it possible for creators to protect their property rights. It also serves another purpose: provide public access to the creation: books, software, designs etc. The broader categories of IP are trade secrets, trademarks, patents, and copyrights.
When should I engage an attorney when forming a business?
Yesterday. This from my experience as someone who has started a business and someone who has advised others to start and worked with already established businesses. When we launch, we need to figure out a lot of tasks. There is a wide range of legal issues. Think of the role of an attorney as a guide and, also, as someone who will handle the issues that arise who will help you improve the business and stay focused on what’s important. We can handle the problems before they begin which requires less time and less money or we can handle them when they keep us up at night which requires more time, more money, more resources. Engaging a lawyer from the beginning will help you address and prevent the problems before they begin.
What is the difference between an employee and an independent contractor?
The best explanation I can come up is the following: If you need work done you have two options, hire someone to do it and control how it is done, give the directions how to do the job, or you can find one that has the skills, the tools, plans the work by himself or herself and delivers it accordingly with little to no supervision. In the first instance, you hire an employee, whereas in the second instance you hire an independent contractor. Lastly, IRS has a publication on the subject for employers to assess the role of an employee and that of an independent contractor.