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Business Law - General Steps to Forming an Entity.

Beginning a new business operation can seem like a daunting process to a first-time business owner. With effective research, communication, and legal planning, however, the steps it takes to open the doors of your dream company can actually be much easier than expected. Once you have decided which entity structure to form (see Business Structure Article), it is wise to consult an attorney in order to outline the objectives ahead that will progress you towards your future business goals.

The first step in forming any business entity is to file the appropriate documents with the state you would like your company to be incorporated or organized in. Generally, you or your attorney can accomplish this digitally through a designated website or via mail. In Texas, the fee for this filing ranges from approximately $300 to $750, depending on the type of entity being formed. Before this can be done though, it is important that you choose a name for your business.

In most states, a proposed name search can be conducted by either calling the relevant state’s offices and asking them to run a preliminary search on a name, or via the state’s website. Either search will reveal the availability of your desired name in the chosen state and region but does not guarantee its registration. Most states determine the acceptability of an entity’s name by not only ensuring it is not already in use but that it is not too similar to an existing name that it creates confusion. If you are in Texas, the Secretary of State may allow you to reserve your requested name for up to 120 days and which can be renewed by filing a new application during the 30-day period preceding the expiration of the current reservation. Once you have selected an available entity name, you will need to select a registered agent for your company. A registered agent is a designated individual or business who may be served on behalf of the business any process, notice, or demand required or allowed by law to be served upon the entity. Oftentimes a business owner has his or her attorney act as the registered agent.

When all this information has been compiled, you are ready to submit your formation documents. Side note: if the entity is established through a partnership structure in Texas, you are not required to file formation documents with the Secretary of State but it is still advisable that the partners execute some form of a partnership agreement.

Next, it is important that your company establish and file for its Employer Identification Number (EIN), with the Internal Revenue Service (IRS) for tax purposes. This number can be filed for through an SS-4 application which can be completed online through the IRS website for free. Although this process does not require a filing fee, the application form is comprehensive and should be carefully completed as any potential problems with the information can cause significant delays. Upon receipt of a successful application, the IRS will notify and alert you of tax requirements of your business.

Once you have received confirmation of your company’s EIN, it may be necessary to open up a business bank account. This bank account will come in handy when your business is ready to begin accepting payment from customers or clients. Specifically, a merchant services account will allow you to accept debit/credit card transactions from customers. This account will also provide other benefits besides convenience in transactions such as liability protection by keeping your personal and business assets separate, professionalism, potential lines of credit, low transaction fees, and higher interest rates for savings.

Finally, if your entity has more than one owner, it is advisable that you have a comprehensive partnership agreement (for partnerships), operating or company agreement (for LLCs), or company bylaws, organizational minutes, and a shareholder agreement (for corporations) drafted by your attorney. These documents specify the operating rules and regulations of your company and include important provisions such as percentage of ownership, voting rights, responsibilities, powers, interest buy-out rules, distributions, financial decisions, management structure, and much more. Even if your company is not specifically required to outline an agreement such as this, it is highly recommended and can protect your company and its management, members, or shareholders from litigation and personal liability issues. Companies with multiple partners can experience conflict within the management at one point or another in time and these agreements can reconcile solutions for these disputes peacefully before expensive lawsuits are escalated.

After all these steps have been performed and your business is on its way to full operation, it is wise to create a business records book in order to keep track of all important documentation. If you are considering beginning a business today and would like to ensure it is being accomplished correctly in a comprehensive manner, reach out to one of our experienced corporate attorneys today at (210) 503-2800.

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