Business Operations and Business Formation FAQs

How do I start my own business?

Starting your own business can be a risky endeavor, and it requires careful thought and preparation. Being your own business owner, however, can also lead to a great deal of personal satisfaction and success. Once you have determined an initial idea for your business, it is important to thoroughly evaluate the market in which you will be operating and determine how you can best contribute through your original business idea. You will then want to develop a comprehensive business plan that considers how your business will be structured, how it will operate, how you will market, and what your expenses and revenue are likely to look like. This will help you to evaluate whether you can be financially successful and also will allow you to attract potential investors or apply for loans.

You will then need to establish the legal structure for your business, such as a C Corporation or a limited liability partnership. This will depend on the individuals involved in your business, tax implications, and liability risks. Once you have decided on the legal structure that is best for you, you will need to register your business in the jurisdiction of your choice. This could be where you live, or where you want your business to operate. This will include filling out some basic paperwork and paying a registration fee. It is important to remember that this registration will need to be renewed yearly.

Finally, you will need to obtain a business tax ID for paying corporate taxes to the IRS. You will also need to apply for any licenses or permits relevant to your business. For instance, if you will be starting a food-related business, you may need to obtain the necessary health and safety permits from your local government.

Read more about starting a business plan

What is the best business entity for me?

Once you have a business idea and business plan, the next step is to pick a business entity structure. There are many different types of businesses available to owners, and choosing the right one depends on the number of individuals, if any, who will co-own the business with you, your tax preferences, and any liability concerns.

If you are the sole owner of your business, you may wish to run your company as a sole proprietorship. Sole proprietorships are one of the easiest types of businesses to start and often require little to no paperwork. Business taxes are recorded as personal taxes on one's income tax returns. However, sole proprietorships do not provide owners with the same legal protection that is offered by other corporate structures.

Where there is more than one business owner, an alternative to a sole proprietorship is a partnership. This can take the form of a general partnership, limited partnership, or limited liability partnership. The difference between these types of partnerships is primarily how the partnership is run or controlled, and who can be liable for the decisions of the partnership. Partnerships typically must be formalized through a partnership agreement.

Another type of multi-owner business is a corporation. The two main types of corporations are C corporations and S corporations. The main difference between these two is how taxes are treated for each corporation. C corporations pay taxes as corporate entities. For S corporations, the profits of the company pass through the company and on to the shareholders or owners of the corporation, where they are taxed on individual tax returns. Depending on the preferences of your business, or its anticipated size and revenues, one of these methods may be more preferable than another.

Finally, some owners choose to start business that pursue a social good, as opposed to financial profit. These individuals may prefer to structure their business idea as either a nonprofit organization or as a special benefit corporation. If this is something you are interested in doing, it is important to look into the unique formation and taxation requirements for these entities.

Read more about starting a partnership

How do I form a corporation?

There are several steps that any business owner must take in order to form a corporation. These steps are typically outlined by the state in which you live, and you can check with your state's corporation office for more details. First, you must choose a name for your corporation that is distinct from any other corporations registered in your state. You cannot have the same name as a corporation already in existence. Once you have selected a unique name, you must then select who will be the initial directors for your corporation. Most states require that a corporation have at least one director, while others require more than one. Either way, you will need to identify these individuals so that they can be included on your corporation paperwork.

After you have selected a name and directors, the next step is to file formal articles of incorporation with your state's corporation office. These articles are not complicated, and many states have a form that you can simply fill out in order to meet this requirement. When filing your articles of incorporation, you will also be required to pay a filing fee that may be up to several hundred dollars.

Although these are the most important formalities, forming a corporation also requires the creation of corporate bylaws that govern the overall operations for your corporation. Furthermore, you must hold your first board of directors meeting, at which decisions can be made on the governance of your corporation, such as who will be officers of the company and how finances will be handled. These are both important steps in ensuring the success of your newly formed corporation.

Read more about C corporations and business formation.

Why are so many businesses incorporated in Delaware?

More than 60% of Fortune 500 companies are incorporated in Delaware, and for good reason. Delaware is widely regarded as having one of the most sophisticated and modern corporate statutes of any state, and it devotes significant time and effort to developing corporate expertise within its courts. Indeed, Delaware has a court system that focuses exclusively on corporate law issues, known as the Court of Chancery. The Court of Chancery is known for its ground-breaking decisions on corporate law matters, and its existence ensures that disputes among companies incorporated in Delaware are handled in a sophisticated and expedited fashion. Additionally, because of the Court of Chancery, Delaware has well-developed case law and precedent on corporate law issues, making it easier for a corporation to assess its likelihood of success on legal matters.

As a result of the consistency and expertise applied in Delaware courts, most types of investor prefer to invest in corporations that are incorporated in Delaware and can take advantage of the Court of Chancery and all of its benefits. Anyone from bankers to start-up investors may prefer that the corporation in which they invest is affiliated with Delaware. This makes the state an appealing one for new corporations looking for funding and financial support.

Read more about choosing a business location.

Do I need an employee handbook?

No matter how small your business, it can be a good idea to have an employee handbook. A document of this nature can clearly establish rules, rights, and expectations for employees. Having these policies memorialized can increase efficiency, and also serve to protect you from litigation.

Keep in mind that employee handbooks should be worded carefully, as a badly drafted policy can expose you to legal liability. For example, employee handbooks can be construed as employment contracts in some states (even if you don't intend to establish an employment or contractual relationship), and this can provide the basis for a number of legal claims against you. It is a good idea to regularly review and update your employee handbook to ensure compliance with current employment laws.

Read more about employment law compliance.

How do I protect my business ideas?

Depending on what is at stake, there are several options available for protecting your business ideas from being stolen or copied by others. If your business idea is revolutionary or has required extensive money and time on your part, you may wish to seek a patent or trademark to protect your idea. These are legal protections offered by the government and typically require a fee to obtain. If your idea or trademark is complex, or similar to those already registered by others, it may also require the assistance of an attorney in order to navigate the patent and trademark registration process.

In the alternative, if you would just like to ensure that your business partners or employees do not share important business ideas or information with others, your best bet may be to create a non-disclosure or non-complete agreement that employees can be required to sign. These types of agreements help to ensure confidentiality among employees and other individuals associated with your business, and they also protect against their leaving your company to create a competing business nearby that utilizes your ideas.

Read more about trademarks.

What’s the difference between an independent contractor and an employee?

Employees and independent contractors are two different types of individuals who work for an employer. They are treated differently under state and federal law, and there are many protections and benefits that are afforded to employees that may not be offered to independent contractors. Independent contractors are also treated differently for taxation purposes.

The main test for determining whether an individual is an independent contractor or an employee is the amount of control that the employer has over the individual. If the employer can only control the result of the work, such as the ultimate article that is created, the individual is probably an independent contractor. Conversely, employers are more likely to have behavioral control and financial control over individuals who are employees. This means that they can control the method by which the employee works, such as setting office hours or requiring a worker to use certain equipment. They also control the financial nature of the work, such as how a worker is reimbursed or whether they are allowed to seek outside competing business opportunities.

Read more about independent contractors.

Do I need to provide benefits to my workers?

When considering employee benefits, it is important to remember that some are optional, whereas others are required by law. For example, all employers are required to pay Social Security taxes, and employers of a certain size are required to comply with federal family leave and COBRA laws. At the state level, you must participate in the workers' compensation system, and possibly unemployment and/or disability programs. The recently enacted Affordable Care Act (ACA) mandates that employers with 50 or more employees provide health insurance or pay a fee. ACA requirements do not apply to part time workers, but other unemployment and tax obligations may.

Optional benefits include retirement plans, paid vacation time, sick leave, group life insurance, stock options, and transportation costs. While it is your decision whether to offer any of these benefits, making them available can help you attract and retain talent. The costs of some of these benefits can also be tax deductible, and can potentially decrease your Social Security, unemployment, and other taxes.

Read more about business operations.

What does it mean to “write off” business expenses?

When you are able to write off certain business expenses, you can lower your company's tax bill by subtracting certain costs from its gross income. Write offs may even help you to end up in a lower tax bracket, reducing the percentage of your company income that is taxable. Examples of expenses your business can write off include office equipment, rent for office space, and charitable donations. It is important to keep receipts and records of any expenses you write off in case of an audit.

Read more about business tax compliance.

Do I need a physical office for my business, or can I conduct it entirely online?

Due to the popularity of online shopping and services, online businesses are increasingly popular. Often, these types of businesses are run out of an individual's home and do not require a business owner to lease or purchase physical office space. There is no requirement under state or federal law that your office must have a physical location devoted solely to business matters. However, when registering your business, you will be required to provide a business address where your business is located at. This could be your home address or another location, but it is important for determining state and local tax compliance. You cannot start a business without determining some physical space where you can receive mail and correspondence about your business, and from which you will pay taxes.

If you choose to start an online business, it is also important to know that special laws and regulations apply to online businesses in order to ensure compliance with internet laws. For more information, you should consult with a business attorney or the small business administration.

Read more about e-commerce.

If my business is sued, is my personal property be at risk?

If you incorporate your business or form an LLC, this can help to protect your personal assets in the event of a judgment against your company that it cannot afford to pay. Forming a corporate entity creates a legal separation between your personal funds and property and that of the company. Therefore, unless you are intentionally engaging in illegal or fraudulent activity, utilizing company resources for personal purposes, or engaging in certain other wrongful acts, your personal property will generally be protected in the event of a lawsuit against your business.

Read more about corporations and LLCs.

What does it mean to “pierce the corporate veil”?

"Piercing the corporate veil" is a legal term of art that refers to holding a business owner, officer, or director personally liable when they have engaged in wrongful conduct, such as failing to maintain the required separation between the individual and the corporate entity. For example, this can occur when an owner uses corporate funds for personal purposes, or fails to observe proper procedures in operating the business. If found liable in this context, owners can be required to compensate plaintiffs from their personal assets for losses arising from their wrongful conduct.

Read more about corporations and LLCs.