I recently stumbled across a guide for opening a small business in Washington. The guide, which you can read here, is put out by business.wa.gov, a free service that’s designed to connect small business owners with Washington state agencies. For the Seattle small business owner just getting started, it’s a great resource.
What I like about the guide it is how easy it is to use. It’s broken down into 8 steps, with each step given a separate page that contains links to forms and other helpful resources. There’s just the right amount of information to set you on the right path but not weigh you down.
And yet, whenever I read guides like this, I always wish they would flag tasks that require legal help, especially the tasks of choosing a business entity and preparing key documents for the entity. For the non-lawyer, it can be hard to tell when you actually need legal help with these tasks.
So I decided to recreate the first two steps of the guide with annotations to identify when and explain why small business owners might want to call a lawyer (as you read, keep an eye out for “LAWYER ALERTs.”)
Step 1: Planning
For Step 1, the guide encourages small business owners to consider the following before getting started:
- Have you written a business plan?
- Do you know state and local licensing and registration requirements? For help, go to http://bls.dor.wa.gov/licensing.aspx
Answer the questions on the page to get customized information. Keep the information and use it when you license and register your business.
- Have you checked for any additional requirements for starting your business?
- Have you decided what type of business structure you will have?
(For example: sole proprietor, limited liability company, etc.)
- LAWYER ALERT: Choosing a business structure can have profound consequences for management structure, liability exposure, and tax treatment (which you can read more about in an earlier blog post), just to name a few. Most small business owners would benefit from consulting an attorney before choosing an entity structure.
Step 2: Corporate Structure
For Step 2, the guide asks whether the small business owner will operate as a sole proprietor or as a “legal entity” such as an LLC, profit corporation, nonprofit corporation, or limited partnership.
For businesses that will operate as a separate legal entity, they must register with the secretary of state. Registration, in this case, means filing a Certificate of Formation (LLC), Articles of Incorporation (profit corporation), Articles of Incorporation (nonprofit corporation), a Certificate of Limited Partnership (limited partnership), or a Certificate of Limited Liability Partnership (limited liability partnership). Sole proprietorships don’t register with the secretary of state.
LAWYER ALERT: While it’s possible to file a Certificate of Formation, Articles of Incorporation, or the like without the help of an attorney, it’s wise to have legal help if you choose to establish important features of the entity in these founding documents, rather than in corporate bylaws or an LLC operating agreement (which we’ll get to in a moment).
Once a business is registered, the secretary of state will issue a Unified Business Identifier (UBI) number and send formation documents to the business. The business should use the same name and UBI number when dealing with all Washington state agencies.
Next, the guide suggests that the small business owner consider the following things:
- Bylaws if you are a corporation.
- LAWYER ALERT: Unlike the Articles of Incorporation, you won’t find a “fill-in-the-blanks” form for corporate bylaws. That means bylaws will have to be drafted, and it’s generally a good idea to have a lawyer do this. The bylaws establish how the business will be governed and who will do the governing, as well as things like official meeting procedures and the issue of stock. The absence of clearly drafted bylaws often leads to conflict and confusion down the road.
- Operating Agreement if you are an LLC.
- LAWYER ALERT: An LLC operating agreement functions like a corporation’s bylaws and so, for the same reasons given above, it’s usually a good idea to have a lawyer draft the agreement.
- Governing person information such as officers for corporations and members/managers for LLCs.
Finally, the guide instructs that if you want to be an S-corp, complete the steps for a for profit corporation or LLC with the secretary of state, then contact the IRS for S-corp tax designation. (You can learn more about the S-corp tax classification in an earlier blog post.)
The remaining 6 steps in the guide are great and I encourage you to continue reading them, starting here.
Photo: chuckwater83 | Flickr