10 Steps to Starting a Business
STAGE ONE – Setting Up Shop:
Establishing the Legal Structure of Your
Business Entity
This article continues the multi-part series
describing the 10 Steps to Starting a Business, beginning the first substantive
discussion of the 10 Steps. As discussed
in the previous posting, the 10 Steps to Starting a Business are as follows:
- Business Formation
- Fictitious Name Statement
- Apply for Business Permits and Licenses
- Employer Identification Numbers
- Verify Employment Eligibility (Form I-9)
- New Hire Reporting Program
- Withholding Requirements
- Insurance Requirements
- Workplace Poster Requirements
- Pay Taxes
1. Business Formation.
When starting any business, the first decision you’ll
have to make is deciding what form your business can take. In general, a business will take one of four
forms:
- sole-proprietorship
- partnership
- limited liability company (LLC)
- corporation
Each form of business has different legal, financial,
and tax considerations (e.g. limited liability, ownership and control, etc.),
and therefore, anyone wishing to open a restaurant or bar (or any business, for
that matter), should carefully consider the various options in order to
determine which form is best for their particular goals, objectives and
desires.
Most small business owners assume they can accomplish
this stage simply by using online service providers, such as LegalZoom, to set up a low-cost
corporation or LLC. However, it should
be noted that this can be incredibly risky.
For example, business owners will usually choose to operate as a “single-member
LLC,” one of the most popular forms of business. Generally, the main purpose in forming an LLC
(or corporation) is to acquire limited liability – i.e. the LLC provides the
owner with a liability “shield,” such that if the business is sued for
negligence or unpaid debts, the individual owner cannot be held personally
liable. However, what most small
business owners don’t know is that this liability shield can be “pierced” if the
entity is improperly structured, drafted, or operated. That means if you are sued, you could be
personally wiped out! And in California,
the single-member LLC is the most commonly pierced type of business
entity. Accordingly, it is highly
advisable that you consult with an attorney before setting up your business
entity.
After selecting the form your business will take, you
must then actually establish it as a distinct legal entity – which consists of
completing the appropriate applications, drafting the necessary paperwork, and
registering your business entity with the State. In California, after your business is formed,
you must register it by filing the appropriate forms with the California Secretary of State. (Note, if your business is a sole proprietorship,
you do not need to register your business with the State.)
2. Fictitious
Name Statement
In addition to forming your business, you will also
obviously have to name it. All persons
and entities planning to do business in California under a name different from
their personal name must file a Fictitious Name Statement with the County Recorder Clerk's Office where the business will be conducted.
While filing your FBN may seem like an unimportant
technicality, it should not be neglected, as it can result in fairly extreme
consequences. For example, Business
& Professions Code 17918 essentially specifies that you cannot maintain any
legal actions under the trade name unless the FBN has been properly executed,
filed and published. So make sure to
complete this step before moving forward.
After completing Steps 1 and 2 – properly forming and
naming your business – your business should now be established as a distinct
legal entity. But that is only the
beginning. The next stage is Getting
Licensed…
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