Frequently Asked Questions
Starting in Business immediately poses a number of questions. This page is an attempt at providing answers to a selection of the most common questions which arise. The pages will constantly be expanded, as new questions are being asked and included in this page, which may have general interest for people undertaking new business ventures.To get to the answers to the questions, click on the Question!
Not all questions can be dealt with in here, but we will try to cover more and more ground as the time goes on. Please, if you have a good question, do not hesitate to drop us a line and we will include it into the FAQ's.
No, there is no need to incorporate. But it is advisable that you do. You should understand, that if you run a business without incorporating it, either as an "incorporation" or as an "LLC" (Limited Liability Company), you, as the business owner, are exposed to unlimited financial liability. In fact you "guarantee" an unincorporated business, with your total personal financial capacity. Incorporation means that the business is its own legal person and financial claims on the business are separate from claims against yourself.
But you can open and run a business as a sole proprietor or as a partnership. This is usually done directly, or indirectly, with your own name. If you do not want to use your name, then you have the business registered as "dba" and give it a name of your choice. In other words, if your name is Mark Niemersland, then you register the business as "Mark Niemersland' doing business as (dba) "Happy Lawncare". Your business licenses will state it that way, as does your business bank account. You as Mark Niemersland are liable for the operation of the business.
The principal advantage of an incorporation (i.e. calling the company "My Company Inc.".) is that it limits normal financial liability of the shareholders to the amount of share holding investment. In other words, if the share capital of the incorporated company is, say $1,000, the maximum financial liability of the shareholders of the company, provided that there is no fraud, negligence or other irregularity or misappropriation, is limited to that amount. This is especially important when one of the companies clients for instance decides to initiate a law suit against the company, for whatever reason. Similarly, incorporation is an important issue, when you decide to take on employees. But you also have to understand that when you incorporate, you have to keep records for the company and pass written resolutions on issues for instance, like setting up a bank account, appointing officers for the company, giving a person the right to sign on behalf of the company and so on. The same procedure applies, if you, as the owner, for instance, takes a loan from the company. There has to be a contract between you, as the owner, and the company, stating amount, length of repayment, rate of interest, and so on, and this has to be approved in a resolution by the company.
You should, however, note that "incorporation" is not a license to be irresponsible and to expose the company to undue risks. If you do that, your creditors can and will sue you as the officer of the company for "negligence". As a newly incorporated company, you are also very unlikely to receive a working capital loan from a bank without any additional security, such as giving a "personal guarantee".
In most States, a simple incorporation can be done through a lawyer for about $300-600, depending on the complexity. The office for incorporation is normally The Secretary of State in your States capital. You do not need to take a lawyer to incorporate, though this is highly advisable. But Office material suppliers, such as Staples and Office Depot or Office Max sell incorporation kits which included all legal documents necessary for an incorporation (less the incorporation form, which you have to get from the Secretary of State in the State, where you incorporate).
The items needed for incorporation are
Once you have incorporated, you have to obtain a business license (from county and city, as applicable) and you have to open a "corporate bank account" in the name of the company. The opening of a bank account requires a Corporate Resolution. Usually, your bank will have a preprinted form for that, which you, as the President and as an Officer of the company, will have to sign. You also have to establish an accounting system (using a computer and a small accounting system such as Quickbooks or one of the Programs will help greatly. There are many other accounting programs around, some of them are shown on our pages, and the choice depends on your preference.
You as the owner (shareholder) of the company really have two positions. One as a shareholder, the other one as a salaried employee (being the President or CEO- Chief Executive Officer) for which you need an employment contract made out between yourself and the company. This contract should specify your duties, your salary, length of employment (can be open ended), and the kind of liabilities you have as an employee. Some of the employment aspects of Officers of the Company can also be regulated through the adoption of By-Laws.
In many States, business names can be reserved for a specified period against the payment of a fee to the Office of the Secretary of State.
In summary therefore, incorporation provides a legally safe and regulated environment within which the company can operate, provided you as the owner keep within the "rules of the game". These rules mean that important decisions which the company takes (or you as the owner on behalf of the company), such as giving or getting a loan, or other decisions which materially affect the value of the corporation, have to be decided upon and recorded in the form of Corporate Resolutions. Understanding the importance of such Corporate Resolutions is essential, since you have to realize that the Corporation is a Legal Personality who can make claims on other people and who accepts claims against itself which are quite independent from those made against you as the owner, shareholder of manager of that co-operation.
Notwithstanding whether or not you incorporate, in most States.within the USA, you have to obtain a business license which means to register the name under which you operate the business at various offices in your State, County and City. In many places you get your business license from the County and City Departments of Revenue against the payment of an annual tax. Usually, a license is required from the State, County and from the City in which you operate as well. The annual license fee charged normally varies with the size of the annual business turnover (annual sales revenue). starting usually around $50-150 per year.
In addition to applying for business licenses, you have also to apply for Sales Taxes. This is also done at the State, County and City Departments of Revenue, or in some States at a combined office. This registration for Sales Taxes requires you to make a monthly return with the applicable sales tax collected on the governments behalf. You have to file the return even if you have not collected Sales Taxes in that particular month.
Most cities have rules about the kind of activities that can be carried out in different geographical areas or a municipality. The basis of these are usually zoning laws for commercial zones (stores and offices), industrial zones (factories) and residential zones (houses, apartments, condominiums). Zoning ordinances often limit or even prohibit business activities in residential areas. In most cases as long as a home containing a business is primarily used as a residence and the business activities don't negatively affect neighbors or the area, operating a home based business will be allowed.
To determine what your zoning ordinances are, you have to get a copy of them from your city or county clerk's office or your public library. You have to read it carefully, since business definitions are often vague and if you are in doubt, you ought to consult a lawyer or a legal office (the Small Business Administration office in your city is also often able to help), to help you decide whether you are allowed to run your business from your home. This might cost money, but is well worth it, if the regulations are unclear or difficult to interpret.
That is a difficult question to answer, since different types of business have needs, and sometimes legal requirements for different levels of documentation and also, of the retention period for such documentation.
But, there are some principles which any kind of business has to follow. There are also some prudent rules which exceed what is legally required. For tax purposes, the key to eliminate the fear of the tax authorities (be it the IRS in the USA or the tax authority in any other country) is Documentation.
Adequate documentation should eliminate any fear of the tax authorities challenging your tax return. Such documentation consists of original receipts, canceled checks, and a detailed summary for the reason for each expense having been incurred and being claimed as a business and/or tax deductible expense. The minimum information has to include:
Most business receipts have the documentation regarding the amount, description, and date on the receipt. The business purpose of the activity or expenditure is, however not always apparent on the receipt. The receipt is the most important documentation. And a system for collecting and cataloguing receipts is an essential business tool. Using checks and credit cards makes the retention of receipts much easier and companies like American Express, Visa or Mastercard provide special facilities for small companies and their expense accounts.
Business expenses for the use of cars are treated differently in different countries, but here again, documentation of business trips and clear separations between business, commuting and private use of the car will prevent any undue risk of legitimate car expenses not being allowed by the tax authorities.
Whereas regulations in most countries have become much more strict over the years, few tax authorities will challenge your home office expenses provided you can document that
Having the home as your only business venue will obviously also strongly favor you. You have to understand, however, that you can only deduct a proportion of your home expenses as a business expense. The rules on how you calculate that differs from country to country and, it is essential to consult a tax adviser, before you make such deductions. Though recent US IRS forms have a simple built in formula that relates to how many square feet of your total space in your house you use for business purposes, and only for business purposes.
Yes it is, and some particular consideration should be given to choosing a name for your company. Quite apart from the fact that some names might have been taken by other business ventures and are therefore not available. There are people who maintain that much of the value of a company lies in the name recognition of its customers. At the point where you might want to sell your company, brand names associated with your company may assume some special value. This could be reflected in a higher sales price for the company.
Besides the identification of your business, the name might convey associations with ideas or methods of doing business that potential clients relate to certain desirable qualities. Therefore, research carefully what kind of message you want to transmit to the outside world through the name of your business. A careful balance between something that gives the impression of solidity, inventiveness, reliability, capability and other desirable qualities without raising or implying expectations in the minds of potential clients that you can clearly not fulfill is a save, but not easy choice.To check, if the proposed name for your business is available in your State, phone the Division or Office of Corporations in your State.
The basic rules for how the company operates are THE ARTICLES OF ASSOCIATION. These are usually kept fairly general, to cover as wide an area as possible. More specialized areas can be covered through By-Laws which are sets of rules, that the company adopts through a resolution.These govern areas of the company's activities not covered by the Articles of Association. There is no requirement to adopt by-laws, but they often serve a useful purpose.
Another agreement that is often also a By-Law is a Buy-Sell Agreement. It is written, when in a privately held company, there are more than one shareholder in the company and regulates the buying ansd selling of stock. Usually, it is formulated in a way that forces a selling shareholder to offer his stock first to the remaining shareholders, before he can sell it to a third party. Sometimes it prohibits sales to a third part altogether. It generally, also covers the ability of the shareholder to offer his shares as security, for instance to a bank.
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