So you’ve been working on an idea and you are ready to become an official company. For your first time around this block, even with the self serve packages and web sites out there, it will be worth your time to talk with a good corporate attorney before signing on the dotted line.
Self-serve Legal Sites (LegalZoom.com, MyCorporation.com, etc.)
These sites offer a lot of good advice, education, questionnaires and ultimately kits and/or assistance filing the right papers with the state and federal government. If you’re doing this on your own or you have business partners, it will help to get a lot of questions asked and answers documented before you speak with a lawyer and/or sign up for an incorporation kit through one of these web service companies. Some of these questions I pointed out in a previous post (Young Entrepreneurs – Get it in writing) others will be pointed out going through some of the education and questionnaire links on either self-serve website.
What type of company should I become?
This question comes up a lot and often depends on what you expect your company to become. The more common and new form for entrepreneurs is the Limited Liability Company (LLC). The LLC offers a lot of flexibility and is less restrictive when it comes to distribution of profits/losses, who can be involved in your company and who is responsible for what within the organization. I’ve had C-Corps, S-Corps and LLCs over the years and find that the LLC has been the easiest thus far. Your long terms plans and initial financial backing are two critical components of the selection process.
Expecting huge success and ultimately a public offering (IPO)? If this is part of your business plan and the path you are getting on, I would (though I am no lawyer) suspect you will want a more restrictive corporate structure that will permit a lot of shareholders and provide shelter for founders and owners down the line. If you are on this path, you should seek legal guidance early and will most likely want to opt for a C Corporation structure.
Entrepreneurs, Life-Style Businesses, Consultants and Freelancers. This is the category I have always fallen into. My companies have always been smaller; self financed (with help from time to time) and have not been the type of company that I had ever planned to take public. The S-Corp and LLC offer protection to the owners and in my opinion the LLC offers the most efficient structure for young companies and new entrepreneurs trying to figure it out on their won. You will learn a lot, make mistakes, change your mind, switch directions, gain or exchange partners and adjust your membership as times change and the company evolves. Choosing a flexible structure from the get-go may prevent headaches and wasted money down the line.
There are some potential negatives of being an LLC or S-Corp as well, so I urge you to have that quick discussion with someone more qualified to answer your questions. One quick example of this is that members in an LLC (in NY anyway) do not get a paycheck per se, they receive ‘guaranteed payments’. Not that you can’t take money out or receive funds on a regular basis, but you are not considered an employee with a paycheck and your taxes are not automatically withdrawn. There are immediately some potential tax implications within an S-Corp or LLC that you should discuss in advance with both your lawyer and your accountant.
So answer the question Sayers!
I was asked today, by a freelancer as well as an organizer of a hockey team, what structure should I be and can I use LegalZoom.com or MyCorporation.com. I wrote this ditty for them and others in their shoes. More important than the site you choose is the time you take to prepare for your business venture. Ask yourself the tough questions and get the answers and ideas on paper. Do the research, review the educational links and then go for it. I personally liked the MyCorporation.com site better though the pricing is pretty similar. Once you’re setup, there is nothing to say you cannot change your mind, adjust the structure or amend the documents at anytime. For both of you, the LLC would be fine and either site would work. If you need the name of an attorney to talk to in advance, let me know and I’ll hook you up.
Two other things: First, with both sites/packages, get the Federal ID number (FEIN) upgrade as you will need the number. Second, when you are setup and moving along, get a D&B number and start establishing your corporate credit history. You’ll need that too. Good luck!