What is Entity Formation?
Entity formation is legally registering your business. It includes choosing a structure for your business to meet the needs and requirements of your specific operations. Different entity formations have different tax advantages and liabilities.
While deciding on your business structure and registering your business might sound like simple tasks, there are specific processes involved.
Read the rest of this article to explore the entity formation process, what it entails, and when you should consult with a lawyer for assistance.
What’s the Process of Entity Formation?
Although the steps involved in a business entity formation can vary, they generally include the following:
- Be clear about your business goals. Are you hoping to make money, raise investments, or something else? Be clear about your goals as these will influence the business entity you choose.
- Consider all entity types. These structures include LLCs, partnerships, nonprofits, and more.
- Select a business name. Check that the name isn’t in use and that your trademark isn’t similar to other businesses. You might have to include letters or words in the name, such as “LLC” if you’re setting up a Limited Liability Company.
- File entity formation documents. You’ll have to submit applicable documents for your business with your state authorities. These could include Articles of Organization for LLCs.
- Appoint managers and/or directors. If you’re setting up a corporation, you'll have to appoint directors. If you’re setting up an LLC, you’ll want to set up a team of managers or members.
- Draft internal documents. You’ll want to have all important documents that govern your processes and working relationships drafted, such as operating agreements (for LLCs) and partnership agreements (for partnerships).
- Get an EIN (Employer Identification Number). Issued by the IRS, this number will be used to identify your company. It will appear on all your income tax filings.
- Open a business bank account. This will keep your business costs separate from your personal accounts.
What Tasks are Involved When Setting up Different Business Entities?
How you set up and register your business depends on the business structure you’ve selected. Here are some tips for some common business structures.
Solo Proprietorship
You don’t require major formal steps when setting up this business type because it’s straightforward. However, you might require a license, depending on your industry and state. If you’re running your business under a different name, you will need to register a DBA (Doing Business As) or trade name.
Partnership
Setting up a partnership is similar to the simple process of forming a sole proprietorship, but it requires drafting a partnership agreement. This contract clarifies all roles, rights, and duties of partners in the business.
A partnership can be a general partnership, limited partnership, or joint venture. Depending on the type, you might need licenses and tax registrations.
Limited Liability Company (LLC)
An LLC provides tax advantages and personal liability protection for your members. Setting up an LLC requires you to file Articles of Organization with your state authorities and draft an operating agreement so that you outline all rights and duties of your members. You’ll also need to register for taxes and licenses.
S Corporation
When forming an S corp, you’ll need to file Articles of Incorporation and file an S-election tax status with the relevant tax authorities. You’ll also have to create bylaws and appoint your directors. It’s essential to draft a shareholder agreement so you clarify all shareholder roles and duties.
C Corporation
This is a highly flexible business structure as it enables business operations to continue if an owner leaves the company. For this, you’ll need to file Articles of Incorporation, create corporate bylaws, appoint your directors and officers, and ensure you register for taxes and any required licenses. Documents such as shareholder agreements are also required.
Do You Need a Lawyer for an Entity Formation?
If you’re dealing with a simple and straightforward business entity, such as a sole proprietorship, you might not need legal guidance when setting it up. However, there are many benefits you stand to gain from hiring a lawyer. Here are some to consider.
A Lawyer Will Help You Choose an Appropriate Structure
If you’re unsure of what business structure will benefit you the most, a lawyer will help you by analyzing risk exposure and tax obligations of different structures.
They’ll consider your business goals and growth, as well as if you intend on working with partners or investors.
They’ll Draft Legally-Sound Internal Documents
A lawyer will help you to write and review your business’s internal documents, such as partnership agreements, shareholder agreements, and corporate bylaws.
They will ensure that all information included in the documents is easy to understand, legally compliant, and fair to all parties, while customizing them according to your specific operations.
They’ll Protect You Against Disputes
Your lawyer will consider ownership percentages, profit distribution, contract termination, and other aspects of your business that could lead to future conflicts. They will include important dispute-resolution methods in contracts so that you minimize your risk of legal hassles.
They’ll Do All Filings For You
A lawyer will ensure that you file all important documents correctly and on time. This prevents errors and obstacles during the entity formation process.
They’ll Ensure Your Business is Professional
Working with a lawyer for your entity formation ensures that your business appears legitimate to investors and partners. One of the ways in which they’ll achieve this is by drafting transparent, legally sound internal documents.
They’ll Reduce Your Risks
There are various risks you could be exposed to when setting up a business. A lawyer will minimize your personal liability so that you don’t face unfair financial or legal obligations.
Ready to hire a lawyer for help with your entity formation?
If you need a lawyer for an entity formation, hire a lawyer from ContractsCounsel, an online legal marketplace that connects clients with vetted lawyers on the platform. They will tailor your entity formation to your specific business goals so that you remain legally compliant and protected.
