Starting a Business · November 24, 2021

Starting a New Business: The Legal and Financial Ins and Outs

Starting a new business all starts with a grand vision—but as anyone who's done it quickly discovers, there are more than a few mundane details to iron out along the way. Most business owners probably don't find finance inherently exciting, but if you build a strong legal and financial foundation, you can increase the likelihood that your business will thrive. Following some fundamental steps on the financial side will help support your ongoing success.

1Determine your legal structure

Your business type and goals are important considerations when creating your legal structure. For example, are you going solo, or will you have partners? Many business attorneys don't recommend operating as a sole proprietor, because it exposes you to significant risk. If you're in a partnership but don't have a formal legal structure, you'll be personally liable for your partner's actions in addition to your own.

Operating as a limited liability company, commonly called an LLC, or a corporation will shield you from personal liability. LLCs are typically easier to form and have fewer maintenance requirements than corporations. Although all states allow LLCs, some don't allow single-member or sole-owner LLCs. Check your state's government website for the specific rules.

Once you decide the legal structure, you or your attorney can file articles of formation or incorporation with your secretary of state.

2Line up financing

Depending on the type of business, your start-up costs could range from a few hundred dollars to thousands. You may need funds for marketing, paying contractors or buying inventory.

To determine what you need and how much it will cost to start financing your business, create a brief business plan and map the associated costs. Will you finance this with your savings, help from friends and family, a line of credit or other means? Calculate how much savings you need to start a business.

Your start-up may not yet qualify for a bank loan, but you may as an individual, if you have good credit and assets. In addition, you could tap suppliers, equipment providers or microlenders to ensure you have the cash flow you need.

3Create the applicable agreements

Creating an operating agreement or a shareholders agreement is critically important, especially if you have a co-founder—even if that person is a spouse or a family member. Sit down and discuss what you want to do with the business, including who is responsible for which aspects of the operations, and what occurs if something happens to either of you.

Create a buy-sell agreement, which goes into much more detail regarding the why, what and how of an owner exit. Do the upfront work to clarify and communicate your expectations. Then, have your attorney document these in the appropriate agreements. This will help ensure your business continues to grow and thrive even if you or your partner's priorities change.

4Get an EIN and a business account

You'll need an employee identification number, also known as an EIN or tax ID number. Contact the IRS to obtain your EIN. For most businesses, the entire application and approval process can be done online within a few minutes.

If you're operating as a legal entity, you'll need your articles of incorporation or organization. You may also need a company resolution stating that you're authorized to open a bank account for the business. (Many banks have default resolutions you can use.) Present these documents along with your government-issued identification and EIN.

Make sure you use your business bank account for all your business' activities. Running personal items through your business bank account can cause serious issues with the IRS and could nullify the legal protection that your legal business structure provides.

5Obtain a business license and applicable permits

If you're conducting business locally—and even if you're a freelancer or a sole proprietor—you'll need a business license from your municipality or county, depending on where your office is located. If you're not sure of your jurisdiction, check with your county's license office. The annual licensing fees are typically based on revenue generated.

You may also need permits, like a fire permit to store flammable materials on-site, health department permits for food, liquor licenses if you will serve alcohol and so on. Permits are typically location-based and can be costly, so do your research in advance.

6Follow all the rules

If you operate as a corporation, make sure you hold annual shareholders and board of directors meetings. For all structures, document your decisions, and record any cash infusions into and distributions out of the company.

Starting a new business is an exciting leap. Use this resource as a guide—in conjunction with a good business attorney and banker—to help you navigate the uncharted territory so you not only survive, but thrive.


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