In a separate article about business planning I discuss the importance of business planning as a regular part of the business, not just in the business’s formation. Here, I want to discuss business planning in the formation of the company and in particular focus on the formation of a business from a step-by-step analysis.
1. Choose a Business Name; Know Your DBA Requirements.
Choosing a name for your entity seems simple enough. First, follow New York’s laws regarding the name for your particular entity. The name of your company must be different from the name of any other corporation, limited liability company or limited partnership already in existence in New York. You can find out whether your name is already in use by visiting the Department of State website and conducting a “Business Entity Search”.
Note: New York forbids the use of certain terms in corporate names (or only allows them after approval). For example, you cannot use “chamber of commerce”, “state police”, or “state trooper” in the name of your corporation/LLC.
Second, make sure your name is an available domain name and set up a website with that name. This is not a legal requirement, but will help you to establish a web presence. From a branding and marketing perspective the name can make the difference.
Third, consider protecting your name as a trademark or trade name under state or federal trademark laws. As a matter of comprehensive due diligence you should conduct a search on the US Patent and Trademark Office website to ensure that your choice of name doesn’t conflict with anyone else’s intellectual property rights. The last thing you need is to go through the steps of choosing a business name, forming the entity and then finding out you need to retroactively make changes to your business which may in turn mean additional filing fees and perhaps different marketing strategies.
Fourth, if you want your company to do business under a trade name or an assumed name, rather than its legal name, file a business certificate, also known as DBA (doing business as). This is not an expensive or complicated process. Your attorney or accountant can easily prepare the documentation. You can also do this yourself by filing a Certificate of Assumed Name with the New York Dept. of State. The cost of doing so is stated on the website. The costs of filing will depend on which (and how many) counties in New York your business operates.
2. Choose/Form the Business Entity
Choosing the right business entity depends on several factors: (a) costs of creating the entity, (b) long term aspirations of going public, (c) tax planning considerations, and (d) preferred management flexibility. Your choice of entity will consider each of these factors at least to some extent and depending on the nature of your business. Your options as a solo-preneur are limited to a sole proprietorship, corporation, or limited liability company (LLC). Let’s review and compare briefly a choice between a Corporation or an LLC, the two most common choices:
- A corporation is formed by filing Articles of Incorporation with the New York Department of State.
- A corporation is by default a C-corporation however you can make the tax election to be treated as an S-corporation which as a typical solo-preneur will probably have more favorable tax treatment. You can find the required forms on the Helpful Forms post
- You should also have, at minimal, corporate bylaws and corporate resolutions drafted by an attorney. Bylaws set forth generally how the corporation will be governed by addressing (1) who the directors are (2) who the officers are (3) voting requirements (4) general business considerations.
- If there is more than one shareholder in the corporation you should also have a separate shareholder agreement or buy-sell agreement in place. A typical shareholder/buy-sell agreement will address issues such as succession planning and ownership of the corporation in the event a shareholder dies, becomes disabled, bankrupt, divorced etc. Discussing the benefits of a shareholder/buy-sell agreement with your attorney is a must.
Limited Liability Company:
- An LLC is formed by filing Articles of Organization with the New York Department of State.
- Have an attorney draft an LLC Operating Agreement. This rule applies regardless of whether you are a single member LLC or a multi member LLC but especially if you are a multi-member LLC. A properly drafted Operating Agreement will extensively set forth issues such as capitalization, distributions, management, voting, member rights, transfer of membership interests, and other general business considerations.
- Forming an LLC in New York will also require you to meet the NYLLC publication requirements which can be pricey depending on where the company is located. In New York County the costs of publication are approximately $1,300. In Rockland County or Westchester County the costs are closer to $390.
Forming an LLC or a Corporation also has the benefit, statistically speaking, of making your company less likely to be audited by the IRS. Often, startups want to know which entity is the “right” entity to choose in New York. The decision to form an LLC or a Corporation is fact sensitive and it is almost impossible to generalize which is the better choice. A consultation with your business attorney and CPA is the right place to start.
3. Get a Tax ID
Obtaining a tax ID is an important step for any new business. For one, it enables you to open up a bank account. Information regarding your Tax ID requirements can be found on the IRS website by clicking here. Filing for your EIN can be completed online on the IRS website, by clicking here. Remember, just obtaining a Tax ID does not mean you have formed a company in NY.
4. Open A Bank Account
As far as setting up a bank account is concerned, you will need proof of your corporate status, bylaws or operating agreements, and proof of tax ID. Your business attorney or CPA will have relationships with various bankers and will likely be able to assist in selecting the right banking relationship for your business needs.
5. Secure a Relationship with a CPA
The CPA comes into the picture early in the formation process and is an indispensable resource in business planning. I strongly believe that determining an exit strategy at the beginning of your business, regardless of whether that plan might change during the life of the business (which it probably will), is critical to the structure of any business whether you are a multi-member LLC or a solo-preneur. Especially when considering a multi-partner company, exit strategizing including a properly drafted buy-sell agreement, will help to hedge against the costs and risk associated with a typical “business-divorce” action.
Determining your long term exit strategy will require the combined efforts of a CPA, financial planner, and business attorney.
I highly recommend DHS & Co. They have proven to be an invaluable resource for a majority of my clients.
6. Secure a Relationship with an Insurance Expert
Not all insurance providers are created equal. Trust me on that one. Since insurance is absolutely critical for any business you want to make sure you work with someone that is knowledgeable, responsive, and resourceful. I personally have worked with many but highly recommend Rey Insurance Agency.
7. Determine Your Business Licensing Requirements
Some businesses require special licenses or permits in order to conduct business. For instance, if you are forming or purchasing a nail salon (or similar business) you will need to obtain a license. If you are going to operate a bar you will require a liquor license. If you are a contractor you will need to obtain the proper licenses on both the state and county levels. A consultation with an attorney is highly recommended. This process does not have to be complicated or expensive.