Launching a business can be among the most significant events of your life. We often see entrepreneurs – Bill Gates, Elon Musk, etc. – whose decision to start a business ended up utterly transforming their entire lives, not to mention the huge impact it has on the rest of the world. Naturally, with anything that has the possibility to change your entire life, there is wisdom in seeking advice on how to do it right and do it well. When first starting a business, there are four steps you must take right away:
1: Select a Business Entity with Care
Entity selection refers to the choice made between various kinds of corporate entities – LLCs, LLPs, C corporations, S corporations, etc. Before you even launch your company, you need to put considerable care into selecting the best type of entity for your particular situation. A fair amount of what makes an entity desirable has to do with tax treatment (which we will discuss below), but other factors are relevant as well. For instance, certain entities have a greater capability to attract investors, and certain entities have limits on the number of shareholders, and so forth. You need to determine which entity is right for you, and this is something which requires a bit of research and analysis or a discussion with a professional.
2: Develop an Operating Agreement
Operating agreements (or shareholder agreements, depending on the entity) are another key piece of the puzzle when it comes to creating a new business. No matter which type of entity you select, you will invariably want to develop a solid operating or shareholder agreement. Essentially, these agreements function as blueprints for how the company will operate. They also contain vital information on a variety of other areas, including voting rights and procedures, ownership structure, exiting procedures for members, certain employment practices, compensation systems, and so forth. Given their importance, these agreements should be accorded proper attention from a qualified professional.
3: Adopt the Optimal Tax Treatment
As referenced earlier, part of the importance of entity selection derives from its association with tax treatment. C corporations are taxed in a separate manner from other entities; specifically, C corporations are taxed on their corporate income, and then taxed again when they disburse dividends to shareholders. The other entities – LLCs, partnerships, S corporations, etc. – by contrast, are passthrough entities, and so their income simply passes through directly to the owner(s) and is then reported on their individual income tax returns.
4: Develop a Clear Vision for the Future
In addition to a sound operating or shareholder agreement, you should also develop a clear path for your foreseeable future. The exact timeframe isn't necessarily critical, but the key thing is to create an outline for how you'd like the company to unfold over the course of a certain period of time. Be sure to identify the most significant milestones you want to hit, and highlight the specific processes which will assist in reaching those milestones. Your company will benefit from having this plan; this type of vision is typically helpful for maximizing cooperativeness, in addition to bringing all sorts of other advantages.
Contact Rust Belt Business Law for Assistance
When starting a business, it's important to choose the appropriate entity, develop an operating agreement, select an advantageous tax structure, and have a plan for the future. With these four things in place, you've created a solid foundation and set yourself up for the best chance at success. To learn more about entity formation, tax structure, operating agreements, or business plans, reach out to one of the business attorneys at Rust Belt Business Law today by calling 814-983-6061.