What Are the Top Five Considerations to Think About When Forming a Business?

July 8, 2024

Whether one is starting a new business as a solo owner, or entering into such a venture with partners, it is an exciting opportunity that can offer multiple benefits. However, starting a business is no easy endeavor. After coming up with a business idea, picking the ideal location, and securing the funding to start the business, potential owners have various considerations to think about before their “grand opening.” Not only will potential owners be bound by certain business law, but employment law is implicated as well. Below is a discussion of several elements a potential owner may want to consider before jumpstarting their business.

  1. Creating a Business Plan

A business plan will act as a road map for an individual seeking to start their first business or expand upon an already existing business. A plan allows one to determine whether their idea is feasible by assessing the market dynamics, competitors, and whether there is enough capital to sustain the initial start-up of the business. A business plan can help an entrepreneur determine what the estimated start-up costs are to open their business, how much it will cost to sustain the business, what the forecasted profits and losses may look like, and what milestones the new business is expected to achieve.

By placing these risks and benefits in a workable plan, potential business owners may discern new dangers and advantages that were not apparent before.  As a result, this allows the individual to expand upon their initial research that can then be incorporated into their business plan.

  1. Registering as the Right Entity

There are different entities a business may register under. Understanding which is the best entity for registering their business is critical because the selected business structure impacts how the owners are taxed, their personal liability, and how much flexibility multiple owners are allocated.

Sole Proprietor

The first option is operating as a sole proprietor. This structure will give an individual complete control over their business. Generally, one is not expected to file any legal registration with the state or federal government. Usually, a business owner automatically becomes the sole proprietor once they start conducting business. A sole proprietor only needs to register their business name if they are using a trade name, or operating under an assumed that is different from the owner’s legal name. Since a sole proprietor is not a separate business entity, the business assets and liabilities are not separate from the business owner’s assets and liabilities. As a sole proprietor, one can be held personally liable for the debts of their business.

Corporation

The second option, a corporation, may offer its owners stronger protections against personal liability. A corporation is a legal entity that is managed by directors, officers, and shareholders; it is a separate entity from its owners. This means if a shareholder leaves the corporation or sells their stock, the corporation can continue operating. Corporations are taxed twice at both the shareholder and corporate level. The corporation is taxed when it makes a profit.

Partnership

A third option is registering as a partnership. A partnership is an association of two or more people carrying on a business for profit. A common type of partnership is the general partnership (GP). In a GP, the partners have unlimited liability for the debts and obligations of the business. Partners in a GP will generally have equal control over the business. For tax purposes, partnerships are seen as a pass-through entity, meaning profits are passed through directly to the tax returns of the partners.

Limited Liability Company

The fourth option, a limited liability company (LLC), borrows from both the corporation and partnership structures. Like a corporation, LLCs offer protection against personal liability by limiting the members responsibility for the LLCs debts and obligations. Like a partnership, LLC’s also offer the benefit of pass-through taxation. Depending on the state the LLC is formed in, if a member leaves or a new member joins the LLC, state law may require the LLC to be dissolved and re-formed with the updated members.

  1. Having a Written Agreement

Whether someone is forming an LLC or a partnership, it is a smart idea to have the terms and conditions of the business expressed in writing in an operating agreement to clarify the terms and conditions amongst individuals. An LLC may need an operating agreement and a partnership may require a partnership agreement.  This agreement outlines the ownership stakes, the varying roles and responsibilities of the individuals involved in the business, how the entity may be dissolved, and the procedure for removing or adding a member/partner.

Having an agreement in place that documents certain rules and procedures is critical when starting a business. It can be a practical guide when the business runs into unexpected circumstances, such as the death of a member/partner or if the business becomes insolvent.  By laying out the terms and conditions of the business, a written agreement can assist business owners in making sure operations run smoothly.

  1. Retaining an Attorney

Business law is a complex area to navigate alone, so having an attorney’s assistance can make kickstarting your business easier. Not only can an attorney assist a potential business owner in drafting operating or partnership agreements, but an attorney can help with real estate leases required to secure a location for the business, leases with vendors and suppliers, and employment contracts.

Choosing a business structure affects the owner’s legal responsibilities. Depending on the business structure, some entities may have to register and file certain documentation with the state in which they will conduct business in to gain recognition. For example, every state will require Articles of Organization to be filed to establish an LLC. Even if the business entity does not need to register with the government, depending on the nature of the business they may be required to obtain special licenses and permits. While these requirements may appear mundane, an attorney can assist an entrepreneur in completing the necessary procedural steps to make their business plan a reality.

Aside from assisting owners on the business side of law, an attorney can also offer insight into employment matters. Whether it is hiring employees, preparing formal job descriptions, or establishing workplace policies, an attorney can assist a business owner on the best practices to observe and guide an owner through different issues that may arise. To start and maintain a business, an attorney can help organize the various requirements and raise considerations a business owner may not have considered

  1. Obtaining Insurance

Depending on the state one chooses to establish their business in, certain insurance policies must be maintained by the business. For example, New York, New Jersey, California, and Rhode Island require LLCs with one or more employees to obtain both workers compensation insurance and disability benefits coverage. Other types of insurances potential business owners may want to consider are business income insurance, general liability insurance, and property insurance to avoid out of pocket expenses, protect one’s business against property damage or natural disasters, and replace lost income if the business is unable to operate due to property damage.  In addition, if specialized services are being provided, professional liability insurance may be in order.

Many times, the type of insurance needed will depend on the nature of the business. A business that utilizes electronic devices to store confidential information may consider obtaining data breach insurance. Not only are some insurances required by law depending on the state the business is incorporated in, but other types of insurance can offer business owners security that is tailored to their business needs.

Takeaway

When forming a business, several key considerations are essential to ensure its success and sustainability. These five considerations help potential business owners navigate legal, financial, and operational challenges effectively, while also mitigating legal risks. By carefully considering and addressing the aspects outlined above, potential business owners can lay a strong foundation for their venture, positioning it for long-term success and resilience.

 

 

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