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5 - Setting Up the Business by DocstocCourses

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									5. Setting Up the Business


     Star%ng	
  a	
  business	
  involves	
  a	
  lot	
  more	
  than	
  simply	
  
     wri%ng	
  a	
  business	
  plan	
  then	
  diving	
  in.	
  Se8ng	
  up	
  
     and	
  registering	
  your	
  business	
  isn’t	
  a	
  glamorous	
  
     process,	
  but	
  it’s	
  cri%cal	
  to	
  take	
  care	
  of	
  before	
  you	
  
     start	
  opera%ng.


     First	
  and	
  foremost,	
  you	
  need	
  to	
  select	
  a	
  business	
  
     en#ty,	
  such	
  as	
  a	
  C-­‐Corp	
  or	
  an	
  LLC.	
  Once	
  you	
  have	
  a	
  
     structure,	
  you	
  must	
  register	
  with	
  your	
  state	
  and	
  
     federal	
  government,	
  and	
  may	
  be	
  required	
  to	
  
     obtain	
  certain	
  licenses	
  and	
  permits	
  to	
  maintain	
  
     compliance.


                   You	
  may	
  also	
  want	
  to	
  consider	
  
             insurance	
  op%ons	
  to	
  protect	
  your	
  business	
  in	
  
                    case	
  of	
  liability.	
  One	
  costly	
  lawsuit	
  
                           could	
  mean	
  the	
  end	
  of	
  your	
  
                                  business—don’t	
  get	
  caught	
  
                                     unprepared.
Choosing the Right Structure

All	
  businesses	
  must	
  be	
  legally	
  recognized	
  as	
  an	
  en%ty,	
  here’s	
  an	
  overview	
  
of	
  the	
  different	
  types	
  of	
  structures	
  you	
  can	
  choose	
  from:




                                                      an	
  unincorporated	
  business	
  run	
  by	
  
   1. Sole Proprietorship                             an	
  individual	
  who	
  is	
  personally	
  liable	
  




                                                                                                                  Chapter 6: Setting Up Your Business
                                                      for	
  any	
  financial	
  debts


                                                      similar	
  to	
  a	
  sole	
  proprietorship,	
  but	
  
   2. General Partnership                             between	
  two	
  or	
  more	
  individuals


                                                     a	
  Limited	
  Liability	
  Company	
  allows	
  
                                                     owners	
  limited	
  personal	
  liability,	
  
   3. LLC                                            doesn’t	
  have	
  stock,	
  and	
  enjoys	
  pass-­‐
                                                     through	
  taxa#on	
  like	
  a	
  partnership


                                                      a	
  company	
  whose	
  owners	
  own	
  
  4. C-Corp                                           shares	
  of	
  stock,	
  subject	
  to	
  double	
  
                                                      taxa#on


                                                      a	
  corpora%on	
  that	
  qualifies	
  to	
  avoid	
  
   5.      S-Corp
                                                      double	
  taxa%on


                                                      a	
  Limited	
  Liability	
  Partnership	
  is	
  a	
  
                                                      business	
  partnership	
  in	
  which	
  one	
  of	
  
    6. LLP                                            more	
  partners	
  have	
  limited	
  liability
Sole	
  Proprietorship


A	
  Sole	
  Proprietor	
  is	
  a	
  business	
  of	
  one,	
  and	
  is	
  actually	
  the	
  most	
  
common	
  business	
  type	
  in	
  the	
  US.	
  Examples	
  of	
  sole	
  proprietors	
  include	
  
aPorneys,	
  plumbers	
  and	
  consultants.


By	
  simply	
  selling	
  a	
  service	
  or	
  product,	
  you	
  are	
  a	
  sole	
  proprietor.	
  It	
  is	
  
the	
  most	
  basic	
  form	
  of	
  a	
  business,	
  and	
  doesn’t	
  require	
  complicated	
  




                                                                                                                      Chapter 6: Setting Up Your Business
filing.	
  


A	
  couple	
  registra%on	
  steps	
  recommended	
  for	
  a	
  sole	
  proprietor	
  are:


                    1) Get	
  a	
  business	
  license	
  from	
  your	
  city	
  or	
  county.	
  You	
  
                       can	
  do	
  this	
  by	
  simply	
  searching	
  “Los	
  Angeles	
  City	
  
                       business	
  license”	
  and	
  following	
  the	
  steps.



                                                   2)	
  Unless	
  you’d	
  like	
  your	
  business	
  to	
  
                                                     be	
  iden%fied	
  by	
  your	
  name,	
  register	
  
                                                     for	
  a	
  fic%%ous	
  business	
  name	
  (DBA,	
  
                                                     Doing	
  Business	
  As).	
  DBA	
  registra%on	
  
                                                     procedure	
  varies	
  by	
  state,	
  see	
  the	
  
                                                     Small	
  Business	
  Administra%on	
  
                                                     website	
  on	
  how	
  to	
  register	
  in	
  your	
  
                                                     area.
General	
  Partnership

General	
  Partnerships	
  are	
  simple	
  business	
  structures	
  similar	
  to	
  sole	
  
proprietorships	
  except	
  that	
  they	
  are	
  run	
  by	
  two	
  or	
  more	
  individuals.	
  
The	
  key	
  to	
  a	
  successful	
  partnership	
  is	
  dra\ing	
  a	
  solid	
  partnership	
  
agreement	
  that	
  covers	
  terms	
  of	
  the	
  business	
  partnership,	
  such	
  as	
  
ownership	
  percentages	
  and	
  who	
  collects	
  the	
  profits.	
  For	
  more	
  helpful	
  
documents	
  related	
  to	
  partnerships	
  check	
  out	
  this	
  package.




                                                                                                         Chapter 6: Setting Up Your Business
    Know the Risks: Personal Liability

       Both partnerships and sole proprietors enjoy easy
       registration and operation procedures, but they carry
       significant risks when it comes to lawsuits or financial debt.

       Owners of sole proprietorships and partnerships have
       primary personal liability for the expenses and debts of their
       company.

       Unlike with corporate entities, which are recognized as
       separate from the owner, if somebody sues your sole
       proprietorship they can go after your personal assets.

       The most popular entity that avoids this risk is an LLC, read
       on to see if that option fits for your business.
Limited	
  Liability	
  Company	
  (LLC)


 An	
  LLC	
  is	
  somewhat	
  of	
  a	
  blend	
  between	
  a	
  partnership	
  and	
  a	
  
 corpora%on.	
  	
  Unlike	
  sole	
  proprietorships	
  and	
  partnerships,	
  it	
  does	
  
 require	
  registra%on	
  on	
  the	
  state	
  and	
  federal	
  level,	
  but	
  it	
  provides	
  
 several	
  benefits	
  worth	
  considering:


 1) Low	
  set-­‐up	
  fee:	
  It	
  costs	
  less	
  to	
  register	
  for	
  an	
  LLC	
  than	
  for	
  a	
  
    corpora%on.	
  Registra%on	
  fees	
  can	
  range	
  anywhere	
  from	
  




                                                                                                                   Chapter 6: Setting Up Your Business
    $100-­‐800	
  depending	
  on	
  the	
  state.	
  LLCs	
  also	
  usually	
  pay	
  several	
  
    hundred	
  dollars	
  of	
  annual	
  filing	
  fees.
 2) Pass-­‐through	
  tax	
  en#ty:	
  In	
  an	
  LLC,	
  you	
  are	
  only	
  taxed	
  on	
  your	
  
    personal	
  income,	
  not	
  the	
  en%re	
  profits	
  of	
  the	
  company.	
  
 3) Limited	
  liability:	
  For	
  example,	
  if	
  your	
  LLC	
  is	
  sued,	
  the	
  prosecutor	
  
    can	
  only	
  sue	
  for	
  your	
  business	
  assets,	
  not	
  your	
  personal	
  assets	
  
    such	
  as	
  your	
  home	
  or	
  personal	
  savings.


 Limita%on	
  of	
  liability	
  (the	
  protec%on	
  of	
  “the	
  corporate	
  veil”	
  )	
  is	
  an	
  
 advantage	
  that	
  LLCs	
  and	
  corpora%ons	
  share.	
  The	
  corporate	
  veil	
  
 recognizes	
  the	
  company	
  as	
  a	
  separate	
  en%ty	
  from	
  the	
  individual.	
  

 The	
  LLC	
  is	
  an	
  aPrac%ve	
  op%on	
  for	
  many	
  business	
  owners	
  as	
  it	
  offers	
  
 the	
  best	
  of	
  both	
  worlds:	
  savings	
  from	
  pass-­‐through	
  taxa%on	
  and	
  
 protec%on	
  from	
  liability.	
  It	
  is	
  a	
  popular	
  choice	
  for	
  retail	
  stores,	
  real	
  
 estate	
  business	
  or	
  growing	
  consul%ng	
  firms.	
  	
  If	
  you’re	
  considering	
  
 selling	
  product	
  online,	
  consider	
  forming	
  an	
  LLP	
  (limited	
  liability	
  
 partnership).	
  Click	
  here	
  to	
  review	
  helpful	
  documents	
  for	
  se8ng	
  up	
  
 your	
  LLC.
C-­‐Corpora%on

 C-­‐Corpora%ons	
  are	
  ideal	
  for	
  big	
  companies,	
  or	
  those	
  with	
  the	
  poten%al	
  
 to	
  grow	
  into	
  much	
  larger	
  businesses.	
  Although	
  your	
  corpora%on	
  may	
  
 expand	
  elsewhere,	
  you	
  should	
  incorporate	
  your	
  business	
  in	
  the	
  state	
  
 where	
  you’ll	
  be	
  handling	
  most	
  of	
  your	
  opera%ons.	
  


 The	
  corpora%on	
  is	
  broken	
  down	
  into	
  3	
  key	
  par%es:




                                                                                                                   Chapter 6: Setting Up Your Business
Board of Directors                         Shareholders                             Officers

  The directors                          Partial owners                          Managers of a
  of the                                 in the                                  company put
  company who                            company.                                in place by the
  are ultimately                         Each owns                               board to run
  responsible for                        “shares” or                             the business,
  the major                              percentages of                          includes the
  decisions of                           the company.                            CEO, CFO and
  the company.                                                                   CTO.




 In	
  a	
  smaller	
  company,	
  one	
  person	
  may	
  be	
  all	
  three	
  of	
  these	
  posi%ons.	
  


 For	
  those	
  seeking	
  large-­‐scale	
  funding,	
  corpora%ons	
  are	
  ideal	
  because	
  
 they	
  can	
  more	
  raise	
  capital	
  from	
  a	
  greater	
  number	
  of	
  investors.	
  It	
  also	
  
 offers	
  the	
  protec%on	
  of	
  personal	
  assets	
  through	
  the	
  corporate	
  veil.	
  	
  
A	
  disadvantage	
  of	
  C-­‐Corpora%ons	
  is	
  double	
  taxa#on;	
  this	
  means	
  that	
  
both	
  income	
  of	
  the	
  company	
  and	
  the	
  dividends	
  of	
  shareholders	
  
(owners)	
  are	
  taxed.


Corpora%ons	
  are	
  also	
  responsible	
  for	
  more	
  reports	
  and	
  filings,	
  as	
  well	
  
as	
  the	
  fees	
  associated	
  with	
  those	
  procedures.	
  Corpora%ons	
  must	
  
maintain	
  bePer	
  records	
  than	
  an	
  LLC	
  or	
  proprietorship,	
  such	
  as	
  
mee%ng	
  minutes.




                                                                                                               Chapter 6: Setting Up Your Business
S-­‐Corpora%on

 An	
  S-­‐Corpora%on	
  is	
  similar	
  to	
  a	
  C-­‐Corp,	
  but	
  avoids	
  double	
  taxa#on.	
  
 To	
  file	
  as	
  an	
  S-­‐Corpora%on,	
  you	
  must	
  file	
  as	
  a	
  corpora%on	
  first,	
  and	
  
 the	
  shareholders	
  must	
  sign	
  and	
  file	
  Form	
  2553	
  to	
  become	
  an	
  S-­‐Corp.




Know the Risks: Piercing the Corporate Veil

  LLCs and corporations are afforded the protection of the
  corporate veil, which separates personal and business assets.
  However, it’s absolutely critical that you keep your personal and
  business finances separate (separate bank accounts etc). If you
  do not, the the corporate veil can be pierced, which means the
  law no longer recognizes the owner and the business as separate
  entities. In those cases, your personal assets may be at risk.
Filing & Business Checking

Once	
  you’ve	
  decided	
  on	
  the	
  en%ty	
  that’s	
  right	
  for	
  you,	
  it’s	
  important	
  that	
  
you	
  properly	
  register	
  your	
  business,	
  and	
  set	
  up	
  a	
  company	
  bank	
  account.	
  
These	
  ac%ons	
  both	
  require	
  a	
  variety	
  of	
  steps	
  depending	
  on	
  your	
  company	
  
type,	
  star%ng	
  with	
  registering	
  your	
  business.

For	
  sole	
  proprietorships	
  and	
  partnerships	
  it	
  isn’t	
  necessary	
  to	
  file	
  with	
  the	
  
state,	
  however	
  for	
  an	
  LLC	
  and	
  corpora%on	
  you	
  will	
  need	
  two	
  key	
  




                                                                                                                         Chapter 6: Setting Up Your Business
documents	
  to	
  file.	
  Most	
  of	
  these	
  documents	
  and	
  resources	
  can	
  be	
  found	
  
on	
  the	
  website	
  of	
  your	
  Secretary	
  of	
  State.

For	
  an	
  LLC,	
  you	
  will	
  need	
  to	
  file	
  the	
  Ar%cles	
  of	
  Organiza%on	
  and	
  an	
  
Opera%ng	
  Agreement	
  with	
  the	
  state.	
  The	
  Ar#cles	
  of	
  Organiza#on	
  is	
  a	
  
fairly	
  straigheorward	
  document	
  containing	
  ini%al	
  required	
  statements	
  to	
  
form	
  an	
  LLC.	
  The	
  Opera#ng	
  Agreement	
  breaks	
  down	
  important	
  aspects	
  
of	
  your	
  business,	
  such	
  as	
  the	
  percentage	
  of	
  ownership,	
  distribu%ons,	
  
responsibili%es	
  and	
  rights.

For	
  an	
  C-­‐Corp,	
  you	
  will	
  need	
  to	
  submit	
  the	
  Ar%cles	
  of	
  Incorpora%on	
  and	
  
Bylaws,	
  which	
  are	
  similar	
  to	
  the	
  two	
  documents	
  filed	
  for	
  an	
  LLC.	
  In	
  order	
  
to	
  open	
  a	
  bank	
  account	
  you’ll	
  also	
  typically	
  need	
  to	
  submit	
  mee%ng	
  
minutes,	
  and	
  a	
  corporate	
  resolu%on	
  authorizing	
  you	
  to	
  open	
  the	
  account.	
  

A	
  general	
  partnership	
  does	
  not	
  need	
  to	
  file	
  with	
  the	
  state,	
  but	
  will	
  
typically	
  need	
  a	
  Partnership	
  Agreement	
  to	
  open	
  a	
  bank	
  account.	
  

Once	
  you’ve	
  incorporated	
  your	
  business,	
  you’re	
  going	
  to	
  have	
  to	
  file	
  for	
  
an	
  EIN,	
  which	
  can	
  be	
  obtained	
  here	
  ,	
  which	
  is	
  a	
  federal	
  taxpayer	
  ID	
  used	
  
to	
  track	
  your	
  employee	
  payments.	
  For	
  a	
  visual	
  flowchart	
  on	
  this	
  process	
  
see	
  the	
  next	
  page.
Flowchart:	
  Steps	
  for	
  Filing	
  &	
  Checking
                  LLC:                                          Corpora#on:	
  
                  You	
  must	
  file	
  these	
  forms	
        You	
  must	
  file	
  these	
  forms	
  
                  with	
  the	
  state:                         with	
  the	
  state:

                  1)	
  Ar#cles	
  of	
  Organiza#on	
          1)	
  Ar#cles	
  of	
  Incorpora#on	
  
                  2)	
  Opera#ng	
  Agreement                   2)	
  Bylaws




                                                                                                           Chapter 6: Setting Up Your Business
Sole	
  Proprietor	
  
or	
  Partnerships:	
  
Obtain	
  a	
  business	
  
license	
  from	
  your	
              File	
  for	
  an	
  EIN	
  (federal	
  taxpayer	
  ID)
city,	
  and	
  a	
  fic%%ous	
  
name	
  or	
  DBA	
  




                                                   Create	
  a	
  company	
  bank	
  
                                                   account,	
  which	
  is	
  an	
  essen%al	
  
                                                   step	
  for	
  keeping	
  business	
  and	
  
                                                   personal	
  expenses	
  separate.
Licenses & Business Insurance


  Licenses	
  and	
  Permits




                                                                                                                   Chapter 6: Setting Up Your Business
  Every	
  company	
  is	
  required	
  to	
  have	
  a	
  business	
  license	
  from	
  the	
  
  city	
  it	
  operates	
  in.	
  You	
  can	
  do	
  this	
  fairly	
  easily	
  by	
  searching	
  online	
  
  for	
  “business	
  license	
  (the	
  name	
  of	
  
  your	
  city)”	
  and	
  following	
  
  direc%ons	
  for	
  registering.	
  


  Depending	
  on	
  the	
  type	
  of	
  
  business,	
  you	
  may	
  be	
  required	
  
                                                                        Quick Tip
  to	
  obtain	
  certain	
  federal,	
  state	
                          License123 is an
  and	
  local	
  licenses	
  and	
  permits	
                            easy tool for finding
  to	
  legally	
  operate.	
                                             the required licenses
                                                                          and permits for your
  It	
  is	
  important	
  to	
  make	
  sure	
  you	
                    business type and
  are	
  compliant	
  with	
  all	
  legal	
                              location, and
  requirements	
  to	
  run	
  your	
                                     learning how and
  business	
  in	
  order	
  to	
  avoid	
  costly	
                      where to file them.
  penal%es	
  and	
  fines.
Business	
  Insurance

Especially	
  as	
  your	
  company	
  expands,	
  it’s	
  a	
  good	
  idea	
  to	
  have	
  insurance	
  
covering	
  the	
  variety	
  of	
  business	
  lawsuits	
  that	
  could	
  arise.	
  These	
  are	
  	
  
several	
  common	
  types	
  of	
  insurance,	
  for	
  more	
  informa%on	
  see	
  this	
  
video	
  or	
  contact	
  an	
  insurance	
  agent.




                                                                                                              Chapter 6: Setting Up Your Business
   • General	
  Liability	
  Insurance:	
  covers	
  a	
  variety	
  of	
  legal	
  hassles	
  
     due	
  to	
  accident,	
  injuries	
  and	
  claims	
  of	
  negligence

   • Product	
  Liability	
  Insurance:	
  protects	
  against	
  financial	
  loss	
  as	
  a	
  
     result	
  of	
  a	
  defect	
  product	
  that	
  causes	
  injury	
  or	
  bodily	
  harm

   • Professional	
  Liability	
  Insurance:	
  protects	
  your	
  against	
  
     malprac%ce,	
  errors,	
  and	
  negligence	
  in	
  provision	
  of	
  services	
  to	
  
     your	
  customers

   • Worker’s	
  Compensa#on	
  Insurance:	
  covers	
  your	
  business	
  from	
  
     liability	
  for	
  injuries	
  incurred	
  by	
  your	
  employees	
  while	
  working.

   • Property	
  Insurance:	
  covers	
  everything	
  related	
  to	
  the	
  loss	
  and	
  
     damage	
  of	
  company	
  property	
  due	
  to	
  a	
  variety	
  of	
  catastrophic	
  
     events

   • Health	
  Insurance:	
  a	
  variety	
  of	
  HMO	
  and	
  PPO	
  plans	
  that	
  cover	
  
     the	
  health	
  needs	
  of	
  employees

   • Life	
  &	
  Disability	
  Insurance:	
  ensures	
  that	
  an	
  employee’s	
  
     income	
  and	
  family	
  are	
  protected	
  in	
  the	
  case	
  of	
  injury	
  or	
  death
Review:	
  Key	
  Vocabulary	
  Terms

 Ar#cles	
  of	
  Incorpora#on:	
  Rules	
  to	
  be	
  filed	
  with	
  state	
  iden%fying	
  
 informa%on	
  about	
  a	
  corpora%on,	
  such	
  as	
  the	
  name,	
  address,	
  
 purpose	
  and	
  number	
  of	
  shares

 Ar#cles	
  of	
  Organiza#on:	
  Rules	
  to	
  be	
  filed	
  with	
  the	
  state	
  to	
  
 iden%fy	
  informa%on	
  about	
  an	
  LLC,	
  detailing	
  the	
  company	
  
 informa%on	
  and	
  management




                                                                                                       Chapter 6: Setting Up Your Business
 Bylaws:	
  Laws	
  that	
  provide	
  the	
  internal	
  opera%ng	
  procedures	
  for	
  
 the	
  governance	
  of	
  the	
  corpora%on

 DBA:	
  Doing	
  Business	
  As,	
  a	
  fic%%ous	
  name	
  under	
  which	
  a	
  sole	
  
 proprietor	
  does	
  business

 Double	
  Taxa#on:	
  Tax	
  on	
  both	
  the	
  profits	
  of	
  a	
  corpora%on	
  and	
  the	
  
 dividends	
  paid	
  to	
  shareholders

 EIN:	
  Employer	
  Iden%fica%on	
  Number	
  used	
  to	
  track	
  employee	
  
 payments,	
  obtained	
  by	
  filing	
  IRS	
  Form	
  SS-­‐4

 Opera#ng	
  Agreement:	
  Details	
  of	
  ownership,	
  distribu%on	
  
 payment	
  and	
  member’s	
  responsibili%es	
  and	
  rights

 Pass-­‐Through	
  Taxa#on:	
  Taxes	
  of	
  a	
  business	
  are	
  “passed	
  through”	
  
 to	
  the	
  owner,	
  unlike	
  double	
  taxa%on	
  of	
  corpora%ons

 Piercing	
  the	
  Corporate	
  Veil:	
  A	
  legal	
  decision	
  in	
  which	
  a	
  
 corpora%on	
  is	
  no	
  longer	
  treated	
  as	
  a	
  separate	
  legal	
  person
Resources Recap
• 	
  Choosing	
  a	
  Structure	
  
       • 	
  Full	
  Guide	
  to	
  and	
  Registering	
  Your	
  Business	
  (course)
    • 	
  Picking	
  a	
  Corporate	
  En%ty	
  	
  (video)
    • 	
  Comparing	
  Business	
  Structure	
  Choices	
  (ar%cle)
    • 	
  What	
  is	
  Sole	
  Proprietorship?	
  (video)
    • 	
  Sole	
  Proprietorship	
  vs.	
  General	
  Partnerships	
  (video)




                                                                                         Chapter 6: Setting Up Your Business
    • 	
  LLCs	
  vs.	
  Partnerships	
  (video)
    • 	
  Business	
  Partnerships	
  Starter	
  Toolkit	
  (legal	
  doc	
  package)
    • 	
  What	
  is	
  an	
  LLC?	
  (video)
    • 	
  LLC	
  Agreement	
  (custom	
  legal	
  document)
    • 	
  Star%ng	
  &	
  Forming	
  an	
  LLC	
  (legal	
  document	
  package)
    • 	
  What	
  is	
  an	
  S-­‐Corpora%on?	
  (video)
    • 	
  S	
  -­‐Corp	
  Shareholder’s	
  Agreement	
  (legal	
  document)
    • 	
  What	
  is	
  a	
  C-­‐Corpora%on?	
  (video)
       • 	
  Incorpora%on	
  Starter	
  Kit	
  (legal	
  document	
  package)
• 	
  Filings	
  &	
  Business	
  Checking
    • 	
  Opening	
  Your	
  Business	
  Bank	
  Account	
  (video)
    • 	
  How	
  to	
  Get	
  an	
  EIN	
  Number	
  (ar%cle)
       • 	
  Essen%al	
  ID	
  Numbers	
  for	
  Your	
  Business	
  (video)	
  
• 	
  Licenses	
  &	
  Insurance
    • 	
  Determine	
  what	
  licenses/permits	
  you	
  need	
  (License	
  Tool)
    • 	
  Choosing	
  Business	
  Insurance	
  (video)

								
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