Initial Steps in Setting up a Business Entity
What goes into Setting up a Business Entity?
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Table of ContentsSETTING UP THE BUSINESS ENTITYWhat goes into the entity formation process?What do I file with the state Secretary of States Office?What tax documents do I file?When do I draft the entity governance documents?
SETTING UP THE BUSINESS ENTITY
Once the decision is made, properly setting up a business entity requires a great deal of effort. Below we provide the primary steps involved in setting up the entity and preparing it to accomplish the startups objectives.
Note: Recall that a sole proprietorship and partnership may arise by the default actions of the business owner(s). This section refers to the process of registering an entity with the state and preparing the organizational governance documents.
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What goes into the entity formation process?
Contrary to popular belief, the entity formation process can be somewhat complicated. Many people believe entity formation to be easy because the actual filing and receipt of the formation documents is a simple process.
However, as discussed in previous material, there is much more that goes into setting up a business entity effectively. That is, setting up the entity so that it is customized to meet the needs of the business.
The following paragraphs give a step-by-step overview of the things that need to be either done or considered when forming the entity.
What do I file with the state Secretary of States Office?
First, the organizer (or incorporator) will visit the Secretary of States webpage and verify the availability of the intended business name. If the name is available and she is not going to immediately file all of the necessary documents, she will want to reserve the name. This will prevent others from taking the name in the interim.
Next she must file the application for formation (the articles of incorporation or articles of organization). Most states have an electronic system to prepare the application that takes the organizer through some simple steps.
While this is a simple manner of creating the organizational documents, it is often advisable to add company specific provisions (such as restrictions on the right to amend the articles). The organizer can always prepare her own articles and upload it through the electronic system.
What tax documents do I file?
During the filing process, the incorporator will prepare and file Form SS-4 (Application for Employer Identification Number) with the IRS and also apply for a state tax reporting number.
If the business sells goods, it may also be necessary to apply for a state sales tax number.
Later, the incorporator or an appointed officer will undertake to set up deposit or withholding accounts for employee income and payroll taxes.
Luckily, numerous software products make it easy to withhold these taxes and report and deposit them with the appropriate taxing authority.
When do I draft the entity governance documents?
Any time before or during this process, the organizer should begin preparing the partnership agreement, operating agreement, or bylaws.
Drafting these documents requires a great deal of work and consideration regarding the business operations.
The documents will govern nearly every aspect of the business operations including: decision-making; authority or voting rights of owners; composition of the board; etc.
The provisions typically included in the governance documents are numerous and can be complex.
A great deal of business strategy and ethos goes into these documents. For this reason, the organizer should work with all of the founders to address the governance provisions. It is also advisable to consult an attorney in drafting these provisions.