How to set up your small business: a lawyer's perspective
COURTESY / RUDMAN WINCHELL
Michael A. Hockenbury is a lawyer in the business-and-corporate practices group at Rudman Winchell.
Whenever I have a client approach me about starting a business, I always ask, "Who is on your team?"
Tom Brady hasn’t shattered a lifetime of records throwing passes to himself in the end zone. He had an entire team working to help move the ball down the field. As a small business owner, you should consider the same. While there are many do-it-yourself websites and the do-it-yourself approach can appear simple at first blush, often you discover that you’ve invested more time and money than you intended or that the process is still incomplete.
Build a team around you. When I say team, I’m talking about the legal and financial support to help get you off the ground and provide assistance as needed along the way. I recommend that my clients should have at least three teammates from day one. Those include a lawyer, an accountant and a bank or credit union. These three teammates can help you avoid unnecessary pitfalls and overcome obstacles along the way.
Choose the right entity. Choosing the wrong entity at the outset can be difficult to reverse, so it is important to consider which type of entity (if at all) you should create. The choices include a partnership, limited liability corporation, S corporation, C corporation, sole proprietorship. The decision can seem daunting.
In deciding which entity works best for you, consider the following questions:
- Do you want to [or should you] own the business yourself?
- What level of personal liability are you comfortable with?
- How do you want the entity to be governed?
- What tax considerations are important to you?
A sole proprietorship is the simplest ownership model for a business owner. It is not a legal entity, but instead refers to a person who owns a business personally and therefore is personally liable for the debts and obligations of the business. While there is usually minimal cost in setting one up, a big disadvantage is that the sole proprietor remains personally liable for the debts and obligations of the business, which means that creditors may attempt to reach the owner’s personal assets.
Partnerships are created when two or more people enter into a relationship for profit. The first step in forming a partnership involves creation of a partnership agreement which establishes each partner’s share of the business as well as the actions the individual partners can take to bind the partnership and the other partners. Partners have a lot of discretion on how they will share the profits and losses of the business, but each partner is generally personally liable for the partnership’s. In Maine, there is no registration requirement for a partnership.
LLC or corporation. The main reason to form a limited liability company or a corporation is to limit the owner’s personal liability. As it is a legal entity separate from its owners, a LLC or corporation can shield its owners from the liabilities of the business. This legal separation protects owners from personal liability in many (but not all) circumstances. Both LLCs and corporations require registration with the state of Maine.
Other rules to keep in mind
Register your business with Maine and the IRS. Maine law requires all LLCs and corporations to register with the Maine Secretary of State in order to conduct business in Maine. When you register your business, you’re holding the entity out as its own separate person, creating that bubble of protection between your personal assets and the liabilities of the company.
Obtain all required insurances, licenses and permits. Businesses and independent contractors in certain trades are required to carry professional licenses. It is important to consider what permits or licenses your town/city, the state and federal government and state governments may require for your business.
If you follow these rules, you should be well on your way to a successful business.
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