Over 30 million Americans own a business. Small businesses are viewed as a way for entrepreneurial individuals to devote their time and talents to a project they feel passionate about, as a way to take charge of your own schedule, and as a way to make additional income. Whether it is your side hustle or your full-time activity, doing things right can protect you and your family. The mechanics of starting a business can be overwhelming. Below is a checklist for things you need to know and how you can get started.
Pick a name. You must first decide what you want to call the business and confirm the name is available in the jurisdiction in which you intend to form your business. In Arizona, you can check for name availability with the Arizona Corporation Commission at ecorp.azcc.gov/EntitySearch. You will also want to see if the website domain is available for your name. You can check domain availability with numerous registrars including Arizona-based godaddy.com. Many now are also confirming name availability on various social media platforms, such as Facebook, Instagram and Twitter.
Create a business plan. This process is often intimidating, but it does not need to be. Online resources are plentiful, and a business plan does not need to be a work of art. Create an operational and marketing plan, understand fixed and variable expenses, and take a realistic review of revenue and the time to ramp-up. Starting pressed for cash is not ideal; one of the main reasons most small businesses fail is undercapitalization. Conventional wisdom suggests that small businesses need two to three years to see marked profits and progress. However, every type of business has its own financing needs and projections.
Select an entity type. There are many different types of corporate entities, including C corporations, S corporations, limited liability companies, general partnerships and limited partnerships. The type of corporate entity selected determines legal ownership and how ownership is vested and evidenced (e.g., through stock certificates), how ownership is managed (e.g., through a board of directors, manager, members or partners), who is authorized to conduct day-to-day business, who has personal legal liability for the debts and obligations of the business, how and when business income and profits are distributed and how taxes are filed. There are many decisions that need to be made to determine the most effective entity type for your business. It is ideal to obtain professional legal and tax assistance before making a final decision.
Register the business. After you have selected your name and have a general understanding of the business operations and corporate entity structure, you need to formally organize the business and register to do business. In Arizona, you can register online at ecorp.azcc.gov/EntitySearch. As part of the registration process, you will need to make additional decisions, including: a business address; the names of the controlling owners, members, managers and/or partners and a registered agent to accept service of process in the event of legal action. If you intend to do business in multiple states, you may need to register the business with the states in which you are doing business.
Draft governing documents. Depending on the type of business created, you will need an operating agreement, partnership agreement, bylaws, shareholder agreement or similar documents that clarify business ownership and organizational governance (including various ownership rights, duties and activities and distributions of profits and losses, among many other things). Historically, Arizona did not require limited liability companies to have an operating agreement. However, on Sept. 1, 2019, significant changes to Arizona’s Limited Liability Company Act became effective. The Act establishes additional, and in many cases, different default provisions governing an LLC in the absence of an operating agreement.
Execute a buy/sell agreement. During the business formation phase and when the business has success, feelings are often euphoric, optimistic and positive. Everyone gets along. It is helpful at this stage to anticipate pitfalls that may occur and plan for discord. A business with multiple owners and operators needs a buy/sell agreement to determine how owners may be removed in the event of discord or dissatisfaction, deadlock, a change in objectives and goals, bankruptcy, divorce and/or another life event.
Obtain an employer identification number. Obtain an EIN from the IRS in order to file taxes. This can be done on the IRS’ website.
Understand legal requirements. Certain types of businesses need state and/or federal licensing and permits to operate. Consider the need for sales tax permits, industry specific licenses, minimum wage laws and ERISA requirements. The legal landscape can be confusing and the applicable requirements may evolve as your business expands geographically or in size (revenue or employee count).
Make a team. Starting a business is hard. Surrounding yourself with trusted advisors is one of the keys to the success of your business. Find the right legal, tax, accounting and marketing consultants. Take the time to make sure they understand your business.
Create a marketing plan. Getting the word out is both easier and harder than it used to be. Businesses today must have an online presence to establish credibility. Marketing through internet and social media advertising and messaging is a key component to many businesses. However, individuals are also inundated daily with online targeted content. Determining how to be different and engage the type of customer you want will be a key component of your success.
Execute an asset protection strategy. Business owners must realize that they are at risk from claims, lawsuits and third-party financial obligations. These risks can impact business and personal assets, and business owners should execute an asset protection strategy to minimize and avoid these risks. Entity formation is one step in that process. Asset protection strategies also include separating business and personal finances, thoughtfully segregating various business assets, obtaining business insurance, and utilizing family limited partnership and a trust to transfer assets.
Ensure personal estate planning is consistent. Business owners should take into account what will happen to the business at the time of their death. Considering who will manage the day-to-day operations, who will buy the business, who can sell the business and who will inherit are key questions to consider and resolve as part of a valuable business succession and personal estate planning. JN
Allison L. Kierman is the managing partner of Kierman Law, PLC, an Arizona estate planning law firm based in Scottsdale, Arizona. Kierman Law guides businesses and families through business corporate and life events. Kierman serves on the board of directors for Congregation Beth Israel and the youth board of directors for the Martin Pear Jewish Community Center.