Free Business Law FAQs | Free Business Law Legal Documents

What steps should I take to start a business?

Fri, 20 Nov 2009 21:06:52 GMT

When starting a new business, several key decisions must be made regarding the organization, financing, management, and operation of the business. First, you should do your homework – research your business idea and prepare a business plan. Once you’ve decided to go ahead with your idea, you will need to determine the legal structure of your business (whether a sole proprietorship, partnership, LLC, corporation, non-profit, or a cooperative) and obtain financing for the start-up costs. After your business is formed, it must be registered with your state or local government – typically through filing a fictitious business name, or “Doing Business As,” statement – and obtain any permits and licenses required by your city or county. Certain industries require additional permits, such as a seller’s permit, or a license to sell alcohol. Finally, businesses must register for state and local taxes, typically including obtaining a tax identification number from the IRS. Upon formation of the business, then it is usually recommended the business establish policies and procedures for employment, operations, recordkeeping, and other important matters.

What are the advantages of a corporation?

Fri, 20 Nov 2009 21:45:37 GMT

Forming a business as a corporation offers many advantages over a sole proprietorship or other entity types. The corporate form gives the owners (called the shareholders) limited liability protection. This means the owners are not liable for the corporation’s debts and, as such, their personal assets are not at risk if the corporation is unable to pay its debts. Also, the owners are not personal liable for the mistakes or misconduct of the board of directors, officers or employees of the corporation. Additionally, corporations enjoy separate tax treatment from its owners. The owners do not pay taxes on the business income. Rather, the owners only pay taxes on the corporate profits that are distributed to them in the form of salaries or dividends. However, the corporation itself must pay taxes at the corporate rate on profits that are realized. Finally, with the stock structure of the corporation, and transferability of shares, it is a form of business which is typically attractive to investors and employees.

What are the advantages of a limited liability partnership (LLP)?

Tue, 24 Mar 2009 12:35:26 GMT

A Limited Liability Partnership (LLP) has many of the same characteristics as a general partnership. However, there is one important advantage to the LLP business model. If a partnership is formed as an LLP then each partner is only personally liable for his or her own negligence or for the negligence of an employee under that partner’s direct supervision. So, if for example, the partners formed an accounting firm and one of the accountants is found guilty of malpractice then only the accountant who committed the malpractice would be personally liable for the damages that incurred as a result of his actions. It is important to note, however, that this limited liability does not extend to business debts which all partners would share in equally regardless of which partner was responsible for incurring the debt.

What are the advantages of a limited liability company (LLC)?

Tue, 24 Mar 2009 12:36:35 GMT

A Limited Liability Company (LLC) is a form of business organization which combines some of the benefits of a corporation with some of the benefits of a sole proprietorship. Owners of an LLC enjoy the limited personal liability for mistakes or misconduct of the business that owners of corporations enjoy. However, LLC owners are not subject to the same tax implications as a corporation. Further, an LLC offers its owners quite a bit of flexibility to determine how the business is going to be managed and how income is going to be allocated among the owners.

What steps are required to form a corporation?

Sat, 21 Nov 2009 00:20:07 GMT

A corporation is a legal entity with a corporate charter from a state. To form a corporation, the following simple steps are required:

1. Select a name for your business. State laws restrict certain words or phrases that can be used in your business name - so make sure you check your state’s rules, which are typically available on the Secretary of State website.

2. Prepare and file the required paperwork with the Secretary of State in the state of incorporation. Typically, Articles of Incorporation must be filed, but in some states the wording is slightly different.

3. Pay the required filing fees.

4. Establish the corporate governance by choosing a board of directors and adopt corporate bylaws.

5. Hold the first meeting of the board of directors and authorize the directors and officers to conduct business. Typically, the first orders of business include issuing stock to the owners, setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.

As time goes on, it is important the board of directors, and officers, conduct business in accordance with corporate governance requirements. Meetings must be held at least annually, and usually more regularly, to document that the corporation is conducting business in accordance with state laws.

What steps are required to form an LLC?

Sat, 21 Nov 2009 00:21:12 GMT

To form a limited liability company, the following simple steps are required:

1. Select a name in accordance with the state’s rules regarding limited liability company names. Certain words may be restricted from being used in an LLC name per your state’s laws.

2. Prepare and file the required paperwork with the Secretary of State in the state where the LLC is to be formed. Typically, Articles of Organization must be filed, but in some states the wording is slightly different. In some states, additional paperwork may need to be filed.
3. Pay the required filing fee.

4. Prepare an LLC Operating Agreement. This is the document that sets forth the rights and responsibilities of the LLC members. LLC’s can be “member-managed” or “manager-managed,” which is typically set forth in the Operating Agreement.

5. Hold the first meeting of the members to authorize the members (or a manager, if the LLC is manager-managed) to take actions necessary to start-up the business. Typically, the first orders of business include setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.

As time goes on, it is important that the LLC conduct business in accordance with the Operating Agreement and state law requirements. Meetings should be held and important business documented. While an LLC does not typically need to follow as many formalities as a corporation, it is important that the members/managers conduct business with sufficient formality so as not to jeopardize the integrity of the entity’s limited liability status.

What is equity financing?

Tue, 24 Mar 2009 12:46:14 GMT

Businesses are usually expensive to open and operate and many businesses need investors in order to make the business successful. One way in which business owners can get funds for their business is through equity financing. Equity financing allows people (or other businesses) to invest in the business in exchange for an ownership interest in that company. The investors may be given common stock or preferred stock in the company and, depending on the amount of money they invest, may be given a seat on the board of directors or other decision making body. Since the investors are given an ownership interest in the company, the money which they invest does not need to be repaid by the company. Instead, the investors are entitled to the potential profits of the company in proportion to their ownership interest.

What is debt financing?

Tue, 24 Mar 2009 12:47:02 GMT

Debt financing is a way for businesses to get the capital that they need to open or to operate an existing business. Debt financing is when a person, business, bank or other entity provides capital to a business and the business has the obligation to pay back the principal on that loan plus an agreed upon rate of interest. Many businesses find that debt financing is advantageous because it provides needed capital while allowing the existing owners to maintain ownership and control of the business. Businesses who engage in debt financing may also be eligible for significant tax deductions. However, businesses need to be able to repay their loans according to the agreed upon repayment schedule in order to avoid negative consequences.

Do I need a license / permit to open my business?

Tue, 24 Mar 2009 12:42:01 GMT

That depends on what type of business you own. Many businesses do not need any special licenses or permits in order to operate their businesses. However, some businesses that engage in certain trades or professions may need special licenses. For example, certain professionals such as doctors, lawyers, teachers and accountants need special licenses, issued by appropriate state agencies, in order to engage in the practice of their profession. Also, some businesses that engage in certain types of commerce such as alcohol or firearms may need special licenses in order to operate.

Do I need business insurance?

Tue, 24 Mar 2009 12:42:51 GMT

Most businesses need some kind of insurance coverage. The type of coverage varies from business to business and many companies need more than one type of insurance policy. For example, professionals, such as doctors and lawyers, usually must have malpractice insurance. Businesses that operate vehicles must have motor vehicle insurance. Many businesses also need property insurance to protect against things such as fires or natural disasters. Since most businesses can benefit from insurance and some businesses are required to have insurance, it is important for every business owner to speak with a qualified insurance agent to review the different types of insurance available and which types make sense for a particular business.

Do I need a Taxpayer Identification Number

Tue, 24 Mar 2009 12:43:24 GMT

A taxpayer identification number (TIN) is a number used by the Internal Revenue Service (IRS) to identify people and companies. Most companies need to file with the IRS to receive an Employer Identification Number (EIN). Those who do not need an EIN typically use their social security number unless they fall under a limited exception to the general rule. A business needs to obtain an EIN if the business has any employees, if it operates as any type of corporation or partnership, if it has to file special tax returns for employment, excise or alcohol, tobacco and firearms or if it is involved with certain types of organizations such as estates or non-profit organizations.

How often do I need to pay taxes?

Tue, 24 Mar 2009 12:44:01 GMT

If you operate a business then you will need to pay your federal and state income taxes and your self employment tax at least annually and likely more often than that. If a business expects to owe $1,000 or more in taxes at the end of the year then the business needs to file quarterly tax returns. Other types of taxes such as business entity taxes and excise taxes must also be paid according to the schedule determined by your state taxing authority.

What benefits must I legally provide to my employees?

Tue, 24 Mar 2009 12:44:39 GMT

The type of benefits which an employer must provide to his or her employees depends on the number of people employed by the company and the state(s) in which the company does business. Private employers typically must pay social security taxes for employees and maintain unemployment and workers compensation insurance for employees. Some states also require employers to carry disability insurance for their employees. The Family and Medical Leave Act provides that certain employers with more than 50 employees must provide 12 weeks of unpaid leave in a 12 month period for certain employees who are caring for a new child or a sick relative. COBRA benefits which provide for temporary continuation of health care coverage when an employee is terminated must also be provided in certain situations.

How do I register a domain name for my online business?

Tue, 24 Mar 2009 12:49:53 GMT

Registering a domain name, or your website address, is an important step for your business. The first thing that you need to do is come up with a domain name that fits your business and that is not already registered by someone else. Then, you need to go to a trusted website that can register your domain name for you. If you have any questions about the validity of the site with which you are considering registering your name then you might check out the company’s reputation with the Better Business Bureau or seek referrals from other businesses who have established websites.

I want to do business online. Do I need to charge state sales tax?

Tue, 24 Mar 2009 12:47:57 GMT

Currently, an online seller has to charge sales tax if that seller has a physical location in the state where the online customer is located. It does not matter what type of physical location the seller has in the customer’s state. For example, if you have a warehouse in Pennsylvania, headquarters in Delaware and stores in New York, Florida and California then you need to charge sales tax to all of your buyers from Pennsylvania, Delaware, New York, Florida and California. However, that seller would not need to charge sales tax to a customer from Arizona.

That said, there is a movement to crack down on this often perceived “loophole” and online business, both new and established, should be prepared to possibly start charging state sales tax to all online customers in the future.

Do I need to develop terms and conditions for my business website?

Tue, 24 Mar 2009 12:50:31 GMT

Yes, creating and posting terms and conditions for your website is probably a good idea. However, it is important that you think carefully about those terms and conditions and, if possible, have an attorney review the terms and conditions before you post them. This is especially important if you are offering anything for sale on your website. An attorney can help you draft terms and conditions that will benefit you should a dispute arise over a transaction on your website. The terms and conditions can, for example, include a choice of jurisdiction clause that allows you to choose your local jurisdiction for all legal disputes which arise from your website.

How can I collect money that is owed to me by my customers?

Tue, 24 Mar 2009 12:51:08 GMT

It is can be difficult and frustrating to have money that is legally owed to you by customers and not have the customers pay on time. After sending an initial bill and not receiving payment you should follow up with an additional bill marked “Overdue.” Additionally, you should call the customer and remind them of the overdue bill. It is important that you record all of your attempts to collect money from your customers so be sure to make note of the date, time and outcome of each phone call and bill. If your actions still do not result in a paid bill then you may need to hire a collection agency or file a claim in small claims court. Prior to contacting a collection agency or filing a lawsuit, however, you must carefully read the terms of the contract or agreement between you and your customer to ensure that you are pursuing your money in the manner in which you both agreed to prior to the dispute.

What is an "S" corporation?

Tue, 24 Mar 2009 12:39:01 GMT

There are several different types of corporations from which business owners can choose when they initially set up their business. One type of corporation is an S corporation. The “S” in “S Corporation” refers to Chapter 1, Subchapter S of the United States Internal Revenue Code. Owners who choose to incorporate an S Corporation are choosing not to have the Corporation pay income taxes but rather to have each shareholder pay personal income tax (or report a loss) on the shareholder’s proportionate share of income (or loss) from the S Corporation. In order to elect to incorporate as an S corporation, the company must have only one class of stock and not more than a certain number of shareholders. Since all of the shareholders are responsible to the IRS and state revenue department for their proportionate share of the corporation’s profits or losses, all of the shareholders must be US citizens or residents and must be people and not other legal entities (such as other corporations, LLC or LLPs.)

What is a "C" Corporation?

Tue, 24 Mar 2009 12:41:22 GMT

A C corporation is the most common type of corporation. The “C” refers to the subchapter of the Internal Revenue Code which explains the rules of taxation for this type of business structure. C corporations may have any number of investors and it can, therefore, be easier to raise the capital necessary to operate the business. Since the number of investors is not limited, C corporations can offer stock incentives to their employees. Corporate owners usually do not have personal liability for corporate debts or negligence. Some businesses also find that it is less expensive to provide health insurance and retirement benefits for employees if their business is properly incorporated as a C corporation.

What Is Limited Liabilty?

Mon, 31 Mar 2008 19:41:42 GMT

Limited liability is a principle of business law which shields the owners of a business from the business's liabilities. Owners of a business which has limited liability may lose only what they have invested in the business, meaning creditors cannot reach to the owner's personal assets to cover the businesse's debts. If a business is sued or goes bankrupt only the assets of the business may be used to cover the debt, a stockholder may not be forced to sell their home or other property to cover their share of the company's debt. Businesses that have limited liabilty are corporations, limitied liability companys (LLC) and limited liability partnerships (LLP).

In a business that is a sole proprietorship or a partnership the owners are personally liable for the business's debts.