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“Starting a business” should begin as soon as the owner decides to open it!
However, as the world becomes more economically and professionally complex, businesses are expected to form according to proper procedures and regulations.
If you’re an entrepreneur or business owner, you may be aware of how challenging establishing a business can be.
All legitimate businesses operate within one of many formations, adding to potential confusion among business owners.
In this article, we’ll aim to provide clarity and explain business formation and its various types.
Additionally, we’ll outline business formation examples, the best business formation services, and your next moves for your business if you want to get started.
Let’s talk business formation!
- Business formation is the chosen structure of a business that informs its position and abilities in the professional sector.
- Business formation is important because it supplies the owner with tax information, liability considerations, ownership structure limitations, and more.
- There are three main business formation services at your disposal: LegalZoom, ZenBusiness, and Incfile
- Getting started can be easy if you follow the proper steps!
What is Business Formation?
Business formation is the chosen structure of a business that informs its position and abilities in the professional sector.
Business formation can involve many different steps, which we’ll cover in this article.
Businesses have existed for millennia, as China and India developed contracts that would be allocated to all companies to solidify ownership and to establish a basic business framework – similar to the processes we have today.
Why is business formation important?
From the vantage point of an entrepreneur or business owner, business formation is imperative for picking the right legal/liability structure, informing marketing choices, taxation, and more.
Additionally, prior to selecting a business formation, obtaining legal and financial advice is suggested to ensure the business formation that you pick is in alignment with the goals of your business.
Types of Business Formations
Below is a list of business formations that you’ll want to be familiar with so that you can make an informed decision about your business’s trajectory:
Limited Liability Company (LLC)
A limited liability company (LLC) is a type of business hybrid that incorporates limited liability protections (as seen in corporations) with more changeable management and tax benefits.
LLCs are typically adopted by small businesses.
Corporations exist as distinct entities from the owners of the company. Owners are instead renamed as shareholders. This type of business formation is very common.
Interestingly, corporations are considered to have the same rights as people. This means that corporations can enter into contracts and be sued like individuals can.
A partnership business structure involves two or more people who enter into a professional agreement that allows them to operate the business together.
Partnerships allow people to combine their proficiencies and resources to operate a company.
Partnerships can avoid federal income tax (which is a positive) but are subject to unlimited liability.
As such, personal assets can be used as business collateral.
Sole proprietorships are the simplest of the business formations. In this type of business, there is a sole owner and operator of a business.
This form of ownership is similar to that of a partnership, but avoids the possibility of business disagreements (beyond internal conflict).
However, items of personal ownership can still be used to settle business debts.
Lastly, nonprofit organizations exist for reasons other than profitability, such as for charitable causes or a defined mission.
Nonprofit organizations are exempt from taxation, but also primarily rely on volunteers for operations as financial gain is not a strong suit of this business type.
Business Formation Examples
Say you’ve just graduated from business school and have an idea for a product or service.
You’re not sure how this product would work, but you’re very business savvy and know how to market the product appropriately.
You could recruit someone from the school of engineering at your university to design and prototype the product.
In this case, it might be beneficial to enter into a legal business partnership!
Best Business Formation Services
Here is a list of our 3 favorite business formation services that we recommend using when forming a new business or entity.
LegalZoom provides stellar DIY legal services or attorney advice, depending on what you’re after.
They have a specific section on their site dedicated to business formation.
ZenBusiness is the perfect platform to help you initiate your business as an LLC.
There are several business packages that you can choose from, with the free package offering an LLC start date of 2-3 weeks from signing up.
With some of the paid options, they’ll provide you with an employer ID number (EIN), business document templates, email addresses, and more.
Incfile provides company formation services to over 1,000,000 business owners.
They do not charge any processing fees for your LLC registration (beyond state fees).
Additionally, you’ll have access to a registered agent to ask questions to.
How to Get Started
There are a few approaches to getting started in your business formation journey, but here are the four of the most transferable actions to any strategy:
- Research business formation services: There are other services beyond the ones listed above, depending on what you’re after. However, all three of those services (LegalZoom, ZenBusiness, and Incfile) are terrific for business formation.
- Choose your business type: As previously mentioned, consider the goals of your business and choose a structure that lines up with those goals. If you plan to keep your business small, an LLC might do the trick. Or, if you want to be a self-made person, you may want to consider sole proprietorship; it’s a completely personal choice!
- Answer specific questions about your business: Questions that may be asked of you as you navigate business formation might be about the name of your business, owner name(s), business intentions, and others. It is recommended that you view the Small Business Association for more details.
- Service will complete and file your paperwork: If you use any of the business formation services listed, they can complete and file your paperwork so that it is organized and accessible in the future.
After you establish your business formation, you may need to reference that paperwork during tax season, audits, and company restructuring.
Now that you have read through this article on business formation, have you considered which formation is the best fit for your company?
If not, it’s wise to create a cost/benefit analysis to determine which formation is right for you.
Your business will thank you for being so diligent in choosing the right framework!
What is business formation law?
Business formation law comprises the legal precedents and procedures that dictate how business formations can operate.
Business formation law can vary from state to state such as in registration, asset protection, taxation, and other important formalities.
How does business formation work?
The business owner(s) have to select the formation under which they will build their business. There are multiple business formations that offer differing benefits.
What are business formation documents?
Business formation documents include paperwork that relates to the status of your business such as tax information, business formation contracts, liability documentation, and more.