According to data analyzed by the St. Louis Federal Reserve, business applications nearly doubled in response to the COVID-19 pandemic beginning in early 2020. Applications, based on the number of individuals and business entities applying for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), rose from about 350,000 in late 2019 to just over 600,000 at the end of 2020.
It is hard to say how many of these applicants survived as ongoing businesses, but as the economy recovers from the pandemic and with the federal government providing stimulus money, applications may continue at all-time highs.
The one thing these applicants all have in common is the need to choose the proper legal entity for their enterprise, whether a sole proprietorship, a partnership, or a form of corporate entity.
If you’re looking to start a business, or are still in the early stages of doing so, the business formation attorneys at COFFYLAW, LLC can guide you in choosing your entity to meet the needs — and concerns — of all involved. With offices in New Jersey and New York, COFFYLAW, LLC represents clients across the nation.
The business entity you choose will affect the taxes you pay, the personal liability you assume, your ability to raise money, and the amount of paperwork and reporting you need. You must also choose your business entity before registering your business with your state. The most common business entities are:
There are other corporate entities for non-profit and charitable enterprises, so consult with attorneys if that is the entity you’re aiming for.
Whereas a business entity is a legal creation, a corporate structure deals with the organization or management hierarchy of the corporate (business) entity. For example, a typical structure (hierarchy) for a "C corp" would consist of the shareholders on top of the pyramid followed by a Board of Directors in the next echelon and a Chief Executive Officer (CEO) would be underneath the Board of Directors. A Chief Financial Officer (CFO) and Chief Operations Officer (COO) would report to the CEO. This layer is often referred to as the C-Suite. Another layer of management would report to the C-Suite and so on.
A sole proprietorship doesn’t need to do much more than register with the state since it is really just an extension of the owner’s personal life and endeavors. All other business structures are going to entail the execution and signing of various agreements and contracts.
A partnership requires a partnership agreement. This agreement will spell out contributions — monetary and otherwise — and responsibilities of each partner, along with a mechanism for sharing profits and losses. It should also include provisions for dealing with a partner who decides to opt-out. Without this clause, the enterprise could collapse with the departure of one person.
LLCs and corporations require even more legal agreements and contracts to proceed. For an LLC, an article of organization is the starting point. Then, an operating agreement will serve a similar function as a partnership agreement.
For a corporation of any type, an article of incorporation must be agreed upon. Company bylaws are needed to spell out the duties of the directors and officers, goals and frequency of corporate meetings, and types and numerical limits of stock classes. If the corporation plans to issue stock, a shareholders’ agreement is necessary to lay out the rights of shareholders and duties of the board and officers.
These are just the basic documents needed for these business structures. States and the federal government will also impose requirements. Knowledgeable attorneys can guide you through the process and help you draft instruments to meet all legal requirements.
In addition to registering your entity with your state, you must also file a form SS-4 with the IRS to obtain an Employer Identification Number (EIN), also known as a federal tax ID number. The quickest way to obtain an EIN is by telephone. If done by mail, it can take up to four weeks.
Depending on the nature of your business, you may also fall under the regulation of various state and federal agencies that may require you to obtain special licenses. For instance, if you plan to sell alcoholic beverages, you will be subject to control by the state Alcohol Beverage Control (ABC) Board from whom you must obtain a license. You will also be subject to the laws and regulations of the Alcohol and Tobacco Tax and Trade Bureau.
You also must cover your liability through various forms of business insurance. The most basic insurance needed by a business is called general liability insurance, which protects against financial loss resulting from a variety of factors, including property damage, bodily injury, libel, slander, and other adverse incidents. Product liability insurance protects against financial loss resulting from a defective product that causes injury or damage. Other types of business insurance cover professional services, home-based businesses, and commercial property.
If you have employees, every state requires you to provide workers’ compensation insurance coverage in one form or another except in limited circumstances.
Getting a business up and running involves a wide range of decisions, along with the creation of various legal documents to set up the structure you desire. And that’s just the beginning. State and federal requirements for registration and licensing are also important steps before you can start operating your enterprise.
Business formation is not something you should undertake by yourself. Getting the advice and guidance of experienced and knowledgeable attorneys is essential.
COFFYLAW, LLC, has offices in New Jersey and New York but serves clients nationwide when it comes to business formation and issues of business law. If you’re seeking to start a business or struggling with the steps to complete the process, call the firm today to schedule a consultation with a trusted team of experienced business law attorneys.