How to Create a Business Entity

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Paperwork used to create a business entity should be saved indefinitely.
Paperwork used to create a business entity should be saved indefinitely. (Image: Documents image by GHz from Fotolia.com)

Entrepreneurs starting a new venture should always run their business as its own legal entity. There are two main types of legal entities: LLCs and corporations. Any business not organized as its own legal entity and owned by one individual is a sole proprietorship. In a sole proprietorship the owner is responsible for all of the actions and liabilities of the business. Business entities such as LLCs and Corporations protect business owners by creating a corporate veil between the business and the owner. LLCs and Corporations may have one owner or many owners. Partnerships are also a form of legal entity but their use has gone by the wayside in favor of LLCs which are taxed similarly but provide better limited liability protection.

Choose what form of business entity you'd like to use. Most businesses today are organized as LLCs or Corporations. The choice between the two is largely a matter for discussion with your CPA and attorney as the technical differences typically impact your tax strategies. In general, corporations are a more formal form of legal entity compared with LLCs, a simpler, more flexible form of entity.

Pick a name for your business entity. Head to the website for the secretary of state where you live. Find the section that allows you to check if someone else is already using the name you would like to use. You need to choose a name that is not already taken and that follows the naming regulations your state has established.

File the appropriate paperwork. Corporations are created by filing articles of incorporation while LLCs are formed by filing articles of organization. Expect to pay a filing fee to the secretary of state of $75-$200, epending on which state you're filing in. The articles used to form your business entity will contain the name of the entity, the names of the primary owners, and the individual who will receive legal notices on behalf of the company.

Execute an operating agreement. Corporations typically refer to operating agreements as shareholder agreements. An operating agreement defines the roles and responsibilities of each owner of the company and provides for valuation of the company and procedures for selling interest in the company.

Tips & Warnings

  • Consider having your attorney file all of the paperwork when creating your business entity. In addition to saving you time, they will likely provide valuable advice and prevent mistakes.

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