First Steps in Starting a Business & Legal Formation

One of the first steps in business formation is to conduct market research to determine whether an idea can translate to economic success. Most people need to start out by getting information about possible customers and businesses already in operation, and then they will create a business plan describing how they will structure and run the business. Among other things, it is important to choose whether the business will be structured as a corporation, LLC, partnership, limited partnership, sole proprietorship, non-profit, or another corporate form.

Developing a Business Plan

A key component of any potential new business is having a business plan, which should outline essential matters such as how much money is necessary to start the business, where the business will be located, and how the operation will become profitable over time. It can spell out whether a loan must be taken out to get the business off the ground, or whether it is possible to raise the capital through other means, such as by taking on limited partners. The location of the business, along with the corporate structure that is chosen, will determine other formalities that need to be observed by the business owner(s). Each state has its own legal and tax requirements for different corporate structures that business entities must comply with.

Business owners must also choose a business name that is not already being used or trademarked by somebody else. It may be appropriate to register the business with federal and tax authorities, and register the business name with the federal and state governments. Business owners that have employees will need to obtain a federal tax ID number or employer identification number, and in some states, it is also necessary to get a state tax ID. Many types of businesses require licenses and permits, and it can be critical to consult an attorney about what you need, given the location of your business and the industry in which it is situated.

Forming an LLC

Some steps are unique to certain business structures. For example, if you are forming a limited liability company (LLC), you will need to make sure that your business name is not the same as that of another LLC by checking with the Secretary of State's Office. If you are creating an LLC, you will need to file articles of organization, develop an LLC operating agreement that specifies the members' percentage interests in the business, obtain permits and licenses, and observe specific formalities like maintaining detailed financial records.

Forming a Corporation

By contrast, if you are forming a corporation, you need to comply with the rules regarding the naming of corporations in the state where you are incorporating. The directors of the corporation, who generally make its major decisions regarding both finances and policy, need to be appointed. Often, the initial shareholders appoint directors prior to the business opening, and sometimes the owners appoint themselves as directors. In most states, it is permissible to have a single director, but in other states, more directors may be required, depending on the number of owners. Once directors are selected, articles of incorporation must be filed. In most states, they must be filed with the Secretary of State's office, which is usually located in the state's capital city. They usually must specify an agent for service of process in case somebody wants to sue the corporation.

Corporate bylaws need to set forth the corporation's operating rules and specify such information as whether directors’ and shareholders’ meetings will be conducted. A first meeting of the Board of Directors needs to be held. Stock certificates must be issued to the corporation's shareholders. Licenses and permits must be obtained, and these vary depending on the industry and the location of the business. For example, you may need a zoning permit from the local planning board.

Last reviewed October 2024