Start-up Business Basics
October 4, 2017
Filed in: Business Law
Written by James R. Hinchliff
Starting a business? Thinking about starting a business?
Are you going to have employees?
Are you going to have other investors?
How do you pay business taxes?
How do you form an entity?
These are just a few of the questions that every start-up business should answer and prepare accordingly through planning and legal documentation.
Every business needs a plan, and a person or group willing to execute it. One of the most important things that a startup business can do is seek out advice on how to get a business formed, what documentation is needed to do so, what liabilities a new business faces, and what a new business needs to be prepared for. These are all important elements of a successful new business plan.
Every decision made by a business is important, but none may be as important as choice of entity or type of business on the long-term federal income tax attributes the business retains. In 1997, the Internal Revenue service established a “check-the-box” system for choice of entity through Treasury Regulations. The Regulations apply to entities formed under Iowa law, including corporations, general partnerships, limited partnerships, and limited liability companies. For federal income taxation purposes, entities formed under state law are generally treated as C Corporations, S Corporations, Partnerships, or Disregarded Entities.
Corporations formed under Iowa law are taxed under Subchapter C of the Internal Revenue Code or, if the proper election is made, under Subchapter S of the Internal Revenue Code. Partnerships and LLCs formed under Iowa law with more than one partner or member are taxed as partnerships under Subchapter K of the Internal Revenue Code by default, but may be taxed as a corporation if an election is made. Single-member LLCs or other individually owned entities are taxed as sole proprietorships as a default; tax attributes are reported on Schedule C of the owner’s Form 1040. Sole proprietorships, treated as a disregarded entity for federal income tax purposes, may elect corporate taxation status.
So once you pick your entity and register it with the State of Iowa, what do you do after your entity is established?
A few things to think about are:
- Make sure that your corporate documents are drafted correctly and in place before you start doing business.
- Get a separate business bank account before you start doing business to maintain the separation between you and the entity just created.
- Obtain a method of tracking income and expenses.
- Create a means of invoicing for your work.
- Consult with insurance professionals about your business and about any potential exposure you may have.
- Establish a filing system for documents related to the business.
The list goes on.
Accuracy of corporate documents and formalities that you observe while your business is in operation may save you and your business from financial ruin. Maintenance of corporate formalities are essential for any new business. It seems as if having corporate meetings, keeping minutes of the meetings, and maintaining corporate records are a waste of time and effort. It is not.
As a start-up business, there are several aspects of your day-to-day work that you may not be able to control. Clients, shipping, orders, meetings, cancellations, and other variables that complicate every work day. Maintenance of good records, excellent bookkeeping habits, and a rigorous attention to detail are always within your control as a start-up. These habits create better profits and opportunities for success and growth into a mature business.
Make a plan. Execute the plan. Build a successful business.