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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)
