Action steps
- Chose your providers: business registration, accounting outsourcing, bank and payment solutions.
- Do the setup.
Choosing the right legal entity
Definitions. In most countries a new company can be registered in one of there primary forms. The simplest way is called sole proprietorship. The company is owned by a single person and this person is fully liable (including personal assets) for financial obligations of a company. The second form is limited liability company (LLC in United States). Ownership can be split in percentages between several owners. If something goes wrong, the company can be bankrupted without its owners paying corporate debt. The third and most complicated form is corporation. Ownership is defined by shares. There can be several classes of shares and new shares can issued in the future. Corporations start with a few shareholders and eventually can go public and sell shares to anyone interested.
Choice. If you do something very simple and short-term focused, sole proprietorship can be the right choice. Majority of small businesses start as a limited liability company. Starting as a corporation from day one makes sense if you are planning to attract outside investment from professional investors.
Offshores. In developing countries many use a structure of local limited liability company as subsidiary of offshore parent corporation. In this case all expenses, salaries, sales taxes and payroll taxes are paid by local company, while profits and ownership structure are managed in offshore. USA, Netherlands, British Virgin Islands and Cyprus are some of typical places to register a parent company.
Business registration
When to register. If you do not have much experience and still early in experimentation stage, register an LLC on day one. One company can operate all your projects and experiments. First attempts may fail, but whenever you have the right idea, the company is already ready to operate it. Once you have a project with serious traction and your founding team stabilizes, you can consider to re-incorporate or change the ownership structure.
If you have experienced founding team, significant initial capital and plan to work for a few months without any public launch, then incorporation can wait. The business should be registered by the time you receive outside investment, hire first employees or getting first paying customers.
Company registration. You can register you company by yourself or with the help of some incorporation service. Unless you have very little money and plenty of free time, outsourcing most routine parts of incorporation makes a lot of sense.
Ownership structure. In parallel with business registration you need to formalize ownership structure of the company. In the simplest form, you allocate some part of the company to each co-founder and your initial investors. If you register a corporation, an option pool (additional shares) can be reserved for future employees.
Co-founder vesting is a buyback option for company to buy some/all shares from a co-founder who leaves early in company history. This approach can be used both for corporations (common) and LLCs (not very common).
Financial setup
Bank account. Once your company is registered you should set up a bank account for it. Transfer your initial capital to corporate account as a loan from business owner. This way, first profits become loan repayment (tax-free) rather than dividends (taxable).
Have clear borders between personal founder finances and corporate finances. Keep most corporate finances in the bank account and minimize the use of cash.
Think how you can run your business completely cash-free.
Bookkeeping and taxes. These activities should outsourced. If you have minimum activity, use online accounting software like Xero.
Official employment and payroll. First-time business owners are sometimes reluctant to register all staff with full salaries, as it requires to pay considerable payroll tax. This approach creates more complexities than benefits and is becoming less common now. The sooner you have all salaries official, the better.
There are plenty of outsourced payroll administration services as well as online solutions like Zenpayroll.
Receiving money. There are four primary ways to receive money: cash register, accepting credit cards offline, accepting credit cards online and direct bank transfers.
As soon as you have bank account you can receive bank transfers. There are plenty of service companies that can set a cash register for you. For credit cards offline look for services like Square, iZettle or Payleven. Online solutions for credit cards include PayPal, Authorize.Net, WePay, Braintree and Stripe.
This article is a part of Earlydays, an open guide for first-time entrepreneurs.
Written by Yury Lifshits — yury@yury.name — @yurylifshits
