What is the business formation process?

Rohan Mathew

Updated on:

Forming a business is a big task and can be easier or more difficult based on various circumstances. No matter how easy or difficult the business formation process may be, there are going to be different aspects of business formation that you have to take into account. Not only that, but not all businesses are going to be set up the same. In order to help you understand the process of forming a business, we have prepared a handy guide to help you figure out all the steps that need to be taken.

What is the business formation process?

Firstly, we need to examine the different types of businesses that one can form. These include establishing a business as a sole proprietorship, a partnership, a limited liability company (LLC), a corporation, and a nonprofit. A sole proprietorship is a common approach for a lot of prospective business owners to take due to the fact that it is an easier — and cheaper — process for them to take than most other options. A sole proprietorship is, basically, a business where you are the sole owner of it, and the business is not considered to be separate from you as its owner. It is neither considered a corporation nor an LLC. Unlike other business types, a sole proprietorship does not have to be registered with the state, although exceptions exist in the event that you intend to hire employees or intend to sell taxable products or services. In order to start one, you pick a name and location for your business, file for a business license, and set up a separate checking account from your personal checking account. Be sure that the name is one that won’t step on any toes of potential competitors.

The next business type is a partnership, which, as the name implies, is a partnership between two parties. Much like a sole proprietorship, you need to decide on a name for the business, also taking care that your name choice is even available for use before settling on it. If it is available, register it. Next, you need to create and sign a written agreement with your partner, ideally one that is beneficial to the both of you. Once you’ve got this settled between the two of you, get your business registered with the state, and then obtain the relevant business permits and licenses.The third business type we are looking at is the limited liability company (LLC), which confers a significant benefit of reducing the liability associated with establishing your business. Pick a name, determine that it is available, and register your LLC’s name. Next up, you need to determine the operations agreement of your LLC, which involves determining how much each owner owns of the company, the responsibilities that each owner is expected to uphold, and what will happen in the event that one of the owners leaves the company. You also have to pick out a registered agent like Northwest Registered Agent to accept legal papers on behalf of the LLC in the event that the company is sued. The company’s articles of organization (AoO) come next, and basically exist to establish your LLC in your state, as well as establish what sort of LLC you are. The AoO includes the name, address, the LLC’s purpose, the name and address of your registered agent, how it will be managed, and the names of the LLC’s owners.

Next up, we have the corporation. Once again, pick a name for your corporation that is available, and register it. Next, appoint directors to various positions. The number of directors is going to depend on what your state designates; some states require that the number of directors be correlated to the number of owners, while others do not. The next step is to file the articles of incorporation (AoI), a process that is a lot like filing an LLC’s AoO. One of the key differences between an AoO and an AoI is that where an AoO requires only one registered agent, an AoI requires three. Next comes the corporate bylaws, which establish the rules of how the corporation is operated. Drafting a shareholders’ agreement is an optional, but important document to have, as it helps figure out the distribution of shares if an owner passes away. A board of directors meeting is also important, as it helps get your directors on the right page. You also have to get the relevant business permits and licenses, register with the IRS and relevant tax agencies, and create a corporate bank account.

Finally, we will look at nonprofits. The first two steps are similar to above-mentioned business types: pick an available name and register it, and then file your articles of incorporation. As a nonprofit, you also want to apply for tax exemptions for both the IRS and your respective state (the latter only in certain states, as in certain states, state exemptions automatically occur through federal 501(c)(3) tax-exempt status). The rest of the details match up with corporations; draft your nonprofit’s bylaws, appoint directors (anywhere from 1 to 3 are required depending on the state of residence), hold a meeting of the board, and obtain the relevant licenses and permits.

When setting up any kind of business, one of the most important things to do is ensure that you do things the proper way, especially given the fact that different states are going to have different rules and guidelines on how things are done. In order to do this properly, make sure that you work with a knowledgeable business law firm who can keep you from making any mistakes while setting things up with your business, regardless of type.