Top Three Frequently Asked Business Law Questions

By Adrienne B. Haynes, Esq.

Managing Partner, SEED Law

When organizing a new business, there are several factors to take into account. We work with our clients to make an appropriate choice of entity, determine the state that will work best for them to formalize in, and to develop their initial governing documents, contracts and agreements. Below are the top three frequently asked questions regarding business formation:

Which type of entity should I form?

One of the most important early steps after the decision to start a business is the analysis on which entity type makes the most sense for your company. The choices of entity options available will depend on your venture’s purpose, ownership structure, service or product offerings, anticipated funding sources, and other business and legal considerations.

The most common types of business entities available in most states include a sole proprietorship, a partnership, a limited liability company, a for profit corporation, or a not for profit corporation. Some state laws do allow for hybrid entities such as benefit corporations, and L3Cs, and other variations, and this should be researched and discussed with a professional to ensure you are aware of your options. To learn more about each entity type, including how to create the entity type, how liability is assessed, required documentation and tax statuses available for each entity, please visit the Choice of Entity and Business Tax Status article.

Where should I register and file my business?

Where an organization formalizes their business depends on a number of factors. Relevant factors include whether your desired choice of entity is available, filing requirements, where your business’ principal place of business is located and/or where key activities take place, and available benefits like tax savings. Some states require annual filings to maintain the organization’s good standing, and others do not. Some states, like Delaware, offer preferential tax treatment to corporations and shareholders, or tax credits, like Kansas. No matter which state you choose, you’ll need to be aware of the statutes and policies which dictate how businesses should be organized and updated.

Where ever you file your business, you’ll also need to select a registered agent. A registered agent is an individual or company designated as the primary point of contact for your business according to the Secretary of State. This agent must be located in the State in question, will receive the company’s official communications from the State and is to receive service in the event of a lawsuit. Depending on your entity type, this address is also where any required annual filing reminders will be sent.

Lastly, after formalizing your business with the Secretary of State, there are likely other agencies that you’ll need to register with. This can include the City that your business operates in for a business license and local taxes, the Department of Revenue for income tax withholding and state unemployment tax, and agencies like the Department of Labor and Industrial Relations for unemployment registration and tax rates. If you’re organized in more than one state, this may require multiple filings and deadlines.

To partner or not to partner?

It’s common for entrepreneurs to consider working with a business partner or team to lead the venture. If you’re considering partnership, remember that the purpose of equity is to compensate for past work done (if any) and to give an incentive to contribute to the company’s future success. With that in mind, consider each individual or company’s situation and contribution, and plan accordingly.

Ask yourself:

• What does each potential partner contribute to the business, both today and in the future? (consider both financial and non-cash assets)

• How will decisions be made between owners?

• How will profits and losses be allocated?

• What are the requirements and qualifications to bringing in new owners? How will business exits be handled if an owner wants to exit before the business ends?

• Are there other ways to partner without owning the business together?

Whether the business is owned by one person or several, taking the time to develop the company’s governing documents gives the founder(s) time to consider important business decisions and details, and to put them in writing. This process minimizes the guess work in conflict, making it easier to make, grow, and have trust in the relationship. Without this document, in the case of triggering events, the law may dictate how your final business decisions are made through statutory defaults.

This article is an overview of business and legal considerations and does not cover every legal right or obligation, consideration, exception, or restriction. These documentations and decisions are complex and should be well researched and discussed with your Professional Team before being made.

To schedule a consultation with a SEED Law attorney, you can give us a call at (816)945–4249 or schedule your consultation today here.