Paperwork—it can spoil a good day. But in business, just how important is paperwork with staying on the right side of regulations, taxes, and property rights? The answer is that every business has a minimal amount of form-filing and recordkeeping needed to protect its status.
Entrepreneurs don’t typically start a business to get bogged down in paperwork. Start-ups often neglect some of the basic steps when creating a new company. However, here’s what you should know about being in compliance and maintaining your own liability protections.
Forming Your Company—Paper Steps
Every new company is formed following a similar set of steps. These include:
– Researching and registering a business name
– Choosing the appropriate form of business entity
– Complying with government requirements for registering a company
– Establishing the roles, rewards, and property rights of any partners or investors
– Keeping a solid paper trail to maintain liability protections against any court judgments
These steps aren’t especially difficult or tedious, and any business person should be at least familiar with them all. Let’s look at them in turn.
Registering Your Business Name
Even a sole proprietorship such as a self-employed contractor working from a home office will usually be required by state law to register a business name if it’s different from simply the contractor’s name. Business names have to be available for use, and you’ll need to search city, county, and state websites to determine this.
As a business makes money, engages in advertising that raises its visibility, or expands into other states, the chances of being noticed by another organization with a similar or identical name will grow. You may be asked to cease and desist using your business name. Therefore, it’s advisable to do a name search in the beginning before you invest too much.
Choosing a Business Entity—Getting It Right
As a business owner you should be familiar with your choices available for business structure. Should you be a sole proprietor, a corporation, an LLC, or a partnership? For the individual or small-business owner, would a single-member LLC or an S Corporation be appropriate?
Important questions to ask include: What is your exposure to liability in the case of a lawsuit? Are your personal assets at risk of attachment for liabilities arising out of business? Do you have partners, employees, or investors in your business? Answers to these questions will help you decide.
At this point, consulting with your tax and legal professionals can pay big dividends. Choosing the correct business entity is commonly held as one of the most critical start-up decisions.
What to File?
Your Secretary of State website is your best asset for research and also for creating a new company. Most states have extremely useful business sites with clear information of requirements and necessary forms, and often a variety of online application procedures. The good news is that none of this is hard.
The sole proprietor or self-employed solopreneur may have to file a DBA (Doing Business As) at the county level to use a business name, and even go so far as to publish a notice in the newspaper of record. Even a Home Occupation Permit may be required in some jurisdictions. And all businesses must determine if there are taxes, licenses, or other fees to be paid at local, state, and federal levels.
Once you’re registered with your company’s home state, over time your changing needs may introduce you to various state forms to amend your entity or convert it to a different structure. You may want to dissolve your company, or revive it following dissolution. You may want to retrieve a Certificate of Good Standing from your Secretary of State as part of a financing or expansion process. Forms and procedures exist for all of these actions, and the process is usually quite clear.
Working With Partners, Members, and Shareholders
A large part of your decision process in choosing your company structure may involve other people. Start-ups with partners working for a combination of financial investment and “sweat equity” may choose a corporation for its established stock options, or an LLC with the ability to specify in detail how to compensate each member.
Corporations have required meetings and must keep records. The LLC is more flexible and simpler, but its Operating Agreement should spell out clearly how to keep records and make decisions. All entities will have to report to the state on a periodic basis.
Know Your Intellectual Property Rights
Partners, associates, and subcontractors in business often take part in early brainstorming conversations during which they create a company’s brand and marketing position. Later, when a company has some money, business owners may find themselves being sued for royalties or ownership rights to these ideas and inventions, collectively known as intellectual Property (IP).
Protection of IP ownership rights is one of the more neglected areas for start-ups and entrepreneurs. But relatively simple paper trails from the beginning can save much heartache and loss down the road.
If a designer creates a logo for you, do you own exclusive rights to this design? If a partner or employee is part of a discussion about best practices or business procedures, does any of it become proprietary to your company? If so, you need to establish who owns this IP.
Standard forms exist, or can be created by your attorney, for agreements such as a Non-Compete Agreement and a Non-Disclosure Agreement, made between members of the business to keep proprietary procedures, skills, and knowledge securely held. There’s also the Intellectual Property Assignment Agreement, which does exactly what it suggests, and establishes who owns what.
Keep a Paper Trail
Even with your initial and periodic filings attended to, how you conduct your business affairs may determine how strong your business entity’s liability protections remain. Courts judging a lawsuit will sometimes “pierce the veil” of a corporate or LLC structure and seize the personal assets of business owners, if they can determine fraud or carelessness.
To ensure that this doesn’t happen, every action must be accountable by paper trail. Follow handshake agreements or conversations with an email to recap what was agreed. Keep personal money and company accounts separate, and use reimbursement forms to use mixed-use company assets such as vehicles. Hold meetings and record minutes and decisions as your business entity requires.
You can have a good day and learn to love paperwork, knowing that it is the essential safeguard of your hard-earned income.
Stan Huser is the founder of SunDoc Filings, a Sacramento-based company that helps entrepreneurs form LLCs or incorporate anywhere in the United States. A pioneer in document filing, Stan started his first company in 1979.