5 things to consider if you are thinking about starting a small business
Thinking of forming a small business?
By: Richard Filce
The attorneys at Lowrey & Fortner, P.A. regularly deal with business formation, transactions, and litigation for corporations, limited liability companies, and partnerships. Getting legal advice before you make a big decision can prevent future problems. Think twice before you try to do it alone.
Here are some common steps in the process with which we can help:
1. Formation with the Secretary of State
The office of the Secretary of State of Mississippi processes new business formation documents. Whether you want to form a Limited Liability Company (LLC) or a Corporation, the process begins by completing an online form and paying a filing fee. For an LLC, it is called a Certificate of Formation. For a corporation, it is known as the Articles of Incorporation. For either type, you are required to select a name which is not already in use.
2. Other Formation Documents
People often make the mistake of believing filing with the Secretary of State completes the process. Actually, it is only the beginning. Depending on whether you want to form an LLC or a corporation, there are different documents which must be completed. Failure to complete these documents could result in a finding that your company lacked the required formal documentation to protect your personal assets.
At the least, an LLC needs an operating agreement (sometimes called an LLC agreement). This is a contract which sets the rules for how the members will interact and run the company. Important considerations include voting rights, membership shares, and management of the company. Without this agreement, any disputes between members will be resolved by the statutes known as the Uniform Limited Liability Company Act.
A corporation has more complex formation requirements. At the least, you will need a set of by-laws (which act similar to the LLC operating agreement), minutes of the first meeting of the incorporators (sometimes called the organizational meeting), and minutes of the first meeting of the Board of Directors. Important considerations include naming officers and providing authority for those officers to act on behalf of the company, i.e. to open bank accounts, etc. Unlike an LLC, a corporation can only act through minutes of meetings which have properly authorized or ratified the actions of its agents.
3. Accounting Concerns
Lawyers are not accountants (at least most of them are not). Do not assume that your lawyer’s advice is necessarily meant to include accounting advice. At our office, we advise that our business clients ALWAYS consult with an accountant. Important topics to discuss with the accountant include income tax treatment for various business types (for example a corporation can either be subchapter S or subchapter C, which have different income tax rules). In addition, many new businesses will need to enroll with the State Tax Commission to withhold and forward sales tax payments collected from customers. Sales tax is not limited to retail businesses, but can also include service industries like contractors, etc. Most new businesses will also need to apply online with the IRS to obtain a tax identification number (also known as an employer identification number or EIN).
4. Annual Reports with the Secretary of State
Whether you form an LLC or a corporation, the Secretary of State requires an Annual Report to be filed online. For corporations this includes a small annual fee. Failure to keep annual reports current can result in the company being administratively dissolved.
5. Other Issues
Keeping in mind that a primary goal of formation is protection of personal assets, we remind our clients about other important aspects of corporate documentation.
First and foremost, the company’s finances must be kept separate from personal finances. This means separate bank accounts, credit cards, etc. It also means that personal expenses should not be paid out of company accounts. You should be sure to keep copies of documentation (bank statements, credit card statements, receipts, etc.) to show that you are maintaining separate finances.
Remember also that a company must be adequately capitalized to meet its anticipated obligations. If you are constantly paying out all of the company’s income to yourself and not leaving sufficient funds on hand to pay the bills, a court could decide to hold you personally liable for those debts.
In addition, you should remember that certain formalities will help prove that your company is being treated as a separate entity. As mentioned above, for a corporation, this requires minutes of meetings be kept, both for shareholders and the board of directors. These should be maintained in a Minute Book. The corporation must also maintain a log of all stock issuances and transfers. While an LLC is not required to keep minutes in the same way (unless the operating agreement says so), we suggest that some form of minutes or written consent be kept for important decisions such as buying or selling major assets.
Learn more about Richard Filce and his areas of practice here.
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