Sep 19, 2023

How to Form a Startup Legal Entity

Starting a new business is an exciting time, but it's important to make sure you take care of all the necessary steps to ensure your startup legal entity is set up properly.

Making Some Initial Decisions

Choosing a name for your business is an important step in the process of setting up a legal entity. The name you choose should be unique and distinguishable from other businesses in your industry. It's a good idea to do some research to make sure the name you want is available and not already being used by someone else. You can lookup existing trademarks on USPTO plus do a Google search of the name to see what comes up. Also ensure that the name is easily spelled when pronounced so that your customers will be able to find you. Ideally, you would also be able to obtain the .com domain for your name if a website will be an important channel for your business.

Startup Legal Entity Types

Once you've chosen a name for your business, you'll need to file the appropriate paperwork to register your business as a legal entity. The exact process for doing this will vary depending on the type of legal structure you've chosen and the state in which you're doing business.For example, if you've chosen to set up your business as a sole proprietorship or partnership, you'll need to register your business with the state and obtain a business license. If you've chosen to set up your business as a corporation or LLC, you'll need to file articles of incorporation or articles of organization with the state. You may also need to file additional paperwork, such as bylaws or an operating agreement, to outline the internal rules and procedures of your business.Here are some common options to consider:

  1. Sole Proprietorship: This is the simplest and most common type of business structure. As a sole proprietor, you are the sole owner of the business and are personally responsible for all aspects of the business, including any debts or legal issues.
  2. Partnership: A partnership is a business owned by two or more people. Partnerships can be either general partnerships or limited partnerships. In a general partnership, all partners are responsible for the management and finances of the business. In a limited partnership, there are both general partners and limited partners. Limited partners have limited liability and are not involved in the day-to-day management of the business.
  3. Corporation: A corporation is a separate legal entity from its owners, meaning it can enter into contracts, incur debts, and be sued in its own right. There are two types of corporations: C corporations and S corporations. C corporations are taxed as separate entities, while S corporations are not taxed at the corporate level (taxation is passed through to the individual shareholders).
  4. Limited Liability Company (LLC): An LLC is a hybrid business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs can have one or more owners, called members, and can be managed by the members or by appointed managers.

When deciding on a legal structure for your business, consider your business's size, type, and future plans, as well as your personal liability and tax considerations. It's a good idea to consult with a lawyer or accountant to help you make the best decision for your business and to help you navigate the process of filing the appropriate paperwork and ensure that everything is properly set up. They can also help you understand any ongoing legal obligations you'll have as a business owner, such as filing annual reports or holding shareholder meetings.

Choosing the State for your Startup Legal Entity

There are a few factors to consider when deciding which state to register your legal entity in:

  1. Location of your business: If your business is physically located in a particular state, it may be more convenient to register your legal entity in that state. This can make it easier to comply with state-specific requirements, such as sales tax and business licensing.
  2. State taxes and fees: Some states may have lower taxes and fees for business registration, which could be a factor in your decision. It may be worth researching the costs and benefits of registering in different states to see which option is most cost-effective for your business.
  3. State laws and regulations: Each state has its own laws and regulations that may affect your business, such as employment laws and business contracts. You may want to consider registering in a state that has laws and regulations that are favorable to your business.

You may have heard that many companies choose to register in Delaware. There are a few reasons for this:

  1. Favorable business laws: Delaware has a reputation for having business-friendly laws, particularly in the areas of corporate governance and mergers and acquisitions. This can make it an attractive state for companies that are planning to go public or are anticipating significant growth.
  2. Efficient court system: Delaware has a specialized court system for resolving business disputes, known as the Court of Chancery. This court is known for its expertise in corporate law and its efficient handling of cases. Many companies choose to register in Delaware in order to take advantage of this court system if disputes arise.
  3. Established corporate law: Delaware has a long history of corporate law and has established itself as a leader in this area. Many companies choose to register in Delaware in order to benefit from this established corporate legal framework.
  4. Reduced compliance costs: Delaware has relatively low costs for maintaining a legal entity, such as annual franchise taxes and fees. This can be a factor in a company's decision to register in Delaware, as it can help reduce compliance costs.

While Delaware may not be the best option for every company, its favorable business laws, efficient court system, and established corporate law make it an attractive state for many businesses.It may be helpful to seek the advice of a lawyer or accountant when deciding which state to register your legal entity in. They can help you understand the potential consequences of registering in different states and make a recommendation based on your specific business needs. Ultimately, the best state to register your legal entity in will depend on your business goals and circumstances. It's important to carefully consider your options and seek professional advice to make the best decision for your business.

Startup Legal Entity Formation

Other Considerations

Once you've decided on a legal structure, you'll need to register your business with the appropriate government agencies. This will typically involve obtaining a business license and registering your business name. You may also need to register for any applicable local licenses or permits, such as a sales tax permit or a zoning permit. You should also consider registering for any necessary federal licenses or permits, such as those required for businesses in specific industries, like food service or healthcare.In addition to these steps, you may also want to consider other legal issues such as intellectual property protection, employment agreements, and contracts with suppliers and customers. Depending on your startup type, you may now have annual reports or other documents to file, so set reminders to ensure you remember the timing of these important documents, in addition to taxes.

Filing Your Startup Legal Entity Paperwork

The specific legal entity paperwork and steps required to register a business will depend on the type of legal entity you are forming and the state in which you are registering.The typical steps involve:

  1. Choose a business name (if you are using a name other than your own)
  2. Obtain any necessary licenses or permits
  3. Register your business with the appropriate state and local authorities (if required)

Additional steps prior to registration are involved for certain types of businesses:

  • Partnership: Create a partnership agreement outlining the terms of the partnership
  • Corporation: File articles of incorporation with the appropriate state agency, hold an organizational meeting and adopt bylaws, and issue stock to shareholders
  • Limited Liability Company (LLC): File articles of organization with the appropriate state agency, and create an operating agreement outlining the terms of the LLC

Setting up the Business Bank Account

Note that the next suggested step will be to set up your business bank account.

  1. Choose a bank by comparing their business banking options of fees, minimums, and online banking options.
  2. Gather your documentation including your business registration documents, tax identification number, and personal identification. Check with the bank to find out exactly what documents are required.
  3. Open the account and set up online banking.

It is important to keep your personal finances separate from your business finances for accounting, tax, and audit purposes, so getting this set up early is helpful.

Next Steps

You’ve set up your entity!Taking the time to properly name and set up your business as a legal entity will help ensure the long-term success and stability of your business. It will also give you the legal protection you need to operate your business and enter into contracts with customers and suppliers.

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