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Forming Your New Business

If you've decided that you want to start your own business, congratulations! Welcome to the nation's ranks of entrepreneurs.

The decision to start your own business is a big step, but it only represents the beginning of a long and sometimes tedious process. New businesses have to come to grips with lots of legal requirements, and it's crucial that you comply with them to avoid major headaches down the road.

Working with the Secretary of State
In most states, the Secretary of State's office oversees the process of registering, licensing, and approving new businesses. If you choose to do business as a corporation or create a limited-liability company, then you will definitely need to work with the Secretary of State to form your business entity. But even if you choose to do business as a sole proprietor or partnership, you may still need to provide some business information to the Secretary of State. Most states now have Internet sites that provide basic information about the process of establishing a business entity. The paperwork you need to complete depends on the type of entity you choose for your business.

If you choose to form a corporation, you will usually need to file quite a few documents with the Secretary of State. First, you will need to file articles of incorporation, sometimes called articles of organization or other similar names. In most states, articles of incorporation require that you provide certain basic information, such as the name of the corporation, the number of shares you want your corporation to have, the corporation's business address, and the name of the person serving as incorporator. Additional required information can include a description of the business, an explanation of more complicated capital structures involving multiple classes of stock, and the initial officers and directors of the corporation.

Second, you must generally file a document naming your registered agent within the state. The registered agent is responsible for receiving legal documents on behalf of the corporation and ensures that the state government knows how to reach your business. If you do business only in your home state, then you can typically act as your own registered agent and can use your business address.

The requirements are similar if you wish to form a limited-liability company. You will need to file articles of organization that state the name of the LLC, its business address, and the name and address of the LLC's manager or managing member.

When you're forming a general partnership or sole proprietorship, many states require comparatively less paperwork. If you intend to use a business name, then many states require you to register the business name as a "fictitious" business name, also known as a DBA, or "doing business as," name.

Once you file the necessary paperwork with the appropriate fee, the Secretary of State will process it and either authorize you to begin conducting business or deny your application. In many cases, even if your application is denied, you may be able to gain approval by doing relatively simple things, such as providing more information or correcting errors. Because filing fees can be fairly expensive, it makes sense to try to get the paperwork right the first time.

Other considerations
Some businesses face additional challenges. For instance, companies that do business in more than one state face additional paperwork. Although you do not need to form separate entities in each state, you will generally need to file certain documents with the Secretary of State in each state in which you do business. By registering as what's known as a foreign business, you submit to the right of the other state to regulate your business according to its laws, even though it was formed under a different state's laws.

In addition, if you are engaged in a profession that has a separate government agency in charge of regulating your industry, then you may have to obtain permission from that agency to form your business. The types of businesses subject to regulation may surprise you; the list often includes not only expensive professions, such as doctors and lawyers, but also more modest occupations, including barbers and hairstylists.

Keeping business and pleasure separate
Although you'll be likely to feel that your entire life is taken up with your new business during its first few months or years, it's important for you to keep your business matters separate from your personal finances. This is especially true if you choose a business entity that limits your personal liability, such as a corporation or LLC. In these cases, the law grants you limited liability based on the fact that the business is an independent legal entity, separate and distinct from its owners. To retain that protection, however, you must respect the entity's independence. For instance, your business should have separate bank accounts and accounting records. All bills and invoices for goods and services your business uses should name the business entity rather than you personally.

If you fail to keep your business affairs separate from your personal ones, you may lose the liability protection of the entity you chose. A creditor might be able to ignore the existence of the business entity and collect business debts directly from you as the business owner. This process, called "piercing the corporate veil," requires a court decision, but it's best to avoid any question of whether it applies by respecting the independence of your business.

The formative stages of your business are a critical time that will affect its success for years to come. By making sure that you correctly perform the initial tasks of establishing your business, you can confidently turn your attention to the other challenges you face as an entrepreneur.

To take command of your finances whether you're in business for yourself or you work for someone else, consider a risk-free trial to the Fool's new personal-finance service, GreenLight.

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Fool contributor Dan Caplinger stopped working for the Man and hasn't looked back. He doesn't hold shares of any of the companies mentioned in this article. The Fool's disclosure policy is always working for you.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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