STARTING A BUSINESS FROM SCRATCH

 

START WITH AN ENTITY

Whether you are buying the assets of a business or are starting a business from scratch, your business needs to be operated in an entity.  By this we mean a corporation or limited liability company.  The law allows you to run your business on your own as a sole proprietorship or in conjunction with a partner in a partnership.  Don't do it.  The chief disadvantage of these forms of business is the unnecessary exposure of your personal assets to the liabilities of the your business.  There may also be substantial tax savings with an entity.  Let's look at the advantages:

Liability:

Let us illustrate the liability problem with a couple of examples:

Scenario ONE: You are a successful broker of beryllium spheres and have exactly one employee, your receptionist Gwen.  You send Gwen to deliver a check to a supplier. Gwen, making an illegal left turn, runs over an oral surgeon on his bike, causing him to lose the use of his right hand. The damages are $2,000,000. You have $100,000 in insurance. As a sole proprietor or partner in a partnership you will be personally liable for the damages. If you were doing business in a corporation or limited liability company, and you had properly maintained your status as an entity, only the assets of the company would be subject to the judgment.

Scenario TWO: You are a successful broker of beryllium spheres because you have tied up a supplier out of Hanksville, Utah, with whom you have an iron clad contract. You sign a contract with Mathesar Enterprises to deliver $500,000 worth of beryllium spheres at a 30% profit. Your supplier’s resource peters out and she is unable to deliver the spheres pursuant to her contract with you and goes into bankruptcy, causing the beryllium market to go through the roof. Mathesar Enterprises sues your company for $300,000 to cover the difference between their contract price with you and the $800,000 they had to pay to get the same quantity and quality of spheres and they sue you for $3,000,000 in consequential damages for the $3,000,000 bonus they lost for late completion of their project caused by the delay due to your breach. Again, if you are a sole proprietor, your personal assets are on the line for the claims by Mathesar. If you were doing business in a corporation or limited liability company, and you had properly maintained your status as an entity, only the assets of the company would be subject to the judgment.

A properly maintained entity can protect you from personal liability for the tort and contractual obligations of your company, its employees, and your partners.  By the way, an entity will not protect you if you are the one that ran over the oral surgeon, or you personally guaranteed the contract with Mathesar.

Taxes:

Putting your business in an entity can save you a fair amount of taxes under certain circumstances. Whether there is an opportunity to save taxes depends upon your entity structure, your personal tax bracket, your other sources of income, and the positions of your partners and investors.  We can give you general guidance in this regard but your structure should be determined in consultation with our office and your CPA.  For instance, in an S corporation, if you, as an owner, pay yourself a salary (subject to all the withholding and taxes as any other employee of the business) approximating the amount of money it would take to replace your position in the business, anything received in excess can be treated like a dividend and will not be subject to SET, self employment tax (about 15.3%), but will be subject to income tax.  By way of example:

If you are the owner of Beryllium Brokers, a sole proprietorship, and after all expenses you netted $100,000 in 2011, you would pay $15,300 in self employment taxes as shown on your schedule SE of your 1040, in addition to federal and state income taxes.  Self employment tax is the equivalent of both the employer’s portion and employee’s portion of the FICA and Medicare payments and deductions that would normally come out of your pay check if you were an employee.  

If you were the owner of Beryllium Brokers, Inc., a Sub-chapter S corporation, with the same profitability for 2011, and you would have to pay a manager $60,000 to do what you do for the company, and you have paid yourself a salary of $60,000 for the year taking out all the normal deductions, you would receive the additional $40,000 as a return on investment and not subject to FICA or Medicare tax, saving you $6,120 in taxes.  You would still be charged income taxes at your marginal rate.  That’s a lot of tax saving but keep in mind that not paying FICA may also reduce your social security payments from the federal government when you retire.


OUR SERVICES

We can set up your entity for you.  The starting price for an entity is $400.00 for an associate and $500 for the managing attorney to do the work. What do you get for your money?  We first meet with you for about an hour for the purpose of determining the appropriate entity and its internal structure to meet your needs from the perspectives of marketing, tax, liability, control, and hassle factor. Then we prepare the document set customized to conform to the results of our initial discussion.  Lastly, we meet with you to review and sign the documents and to give you training on how to run your company from a legal perspective, and how to maintain the limited liability veil that will protect your personal assets.  We will give you instructions on filing, obtaining your tax ID numbers, opening a bank account, how to sign for the company, how to file your annual report, and generally how to avoid personal liability.  Your finished product will include a company document folder, complete with issued stock certificates where appropriate. Then you will file the documents with the state and pay their $70 filing fee. 


The starting price will increase if you are going into business with a partner who is not your spouse, if we need to draft an owner's agreement including such things as a covenant not-to-compete, a buy/sell agreement in the case of death or disability, and other specialized provisions resulting from the arm's length relationship between partners.  We charge hourly for these extra services which typically add $100 to $200 in additional fees assuming a quick decision making process for these specialized provisions.
 


THINGS YOU NEED TO DO BEFORE YOU COME IN 


Pick a name for your new business. 

The name of your business may be important from a marketing perspective.  If you will be putting money into an advertising campaign, you want to make sure you own the name.  You can start by checking with the State of Utah to verify name availability.  The state data base must not have a conflict.  If it does, your filing will be rejected at the filing desk. You can confirm availability of the name you want on the Utah Department of Commerce web site.   Click here  to access our portal to check for name availability.  Clearing your name with the state data base may still not be enough.  If you are going to do business on the net or are going to use the internet as a key marketing forum, you should search the web for conflicts with a business name like yours.  If you can secure the “.COM” URL for your name, grab it.  Also beware, if you are proposing to use initials in the name of your business (“BB Sales” for instance), the state data base does not do an effective job in screening names with initials, and our experience has been that names with initials that clear the data base are later rejected when filed for conflicts that are hand checked by Department of Commerce personnel.

Identify the Registered Agent. 

What is a Registered Agent?  That is the person who is responsible for the receipt of service of legal papers and is a local contact for the Department of Commerce and other government agencies. The registered agent’s address cannot be a P.O. Box. You will want the registered agent to be constantly available at the registered office to make sure you know about it if your company has been sued. Our office can serve as your registered agent if would like.  We charge $150 per year to act as your registered agent.


If you have any question about our services or charges relating to starting a business, please feel free to call.

 

 

 

 

Brought to you by Business Law Associates, L.C., Utah's Small Business Law Firm, 8170 S. Highland Dr, Suite E5, Sandy UT  84093, 801.944.5255.