Starting a New Business: The Legal and Financial Ins and Outs

Starting a new business all starts with a grand vision—but as anyone who's done it quickly discovers, there are more than a few mundane details to iron out along the way.

Fortunately, if you build a strong legal and financial foundation in your business, you can increase the likelihood that it'll thrive. Follow these fundamental steps to help support your company's ongoing success.

1 Determine your legal structure

Your business type and goals are important considerations when creating your legal structure. For example, are you going solo or will you have partners? Many business attorneys don't recommend operating as a sole proprietor because it exposes you to significant risk. If you're in a partnership but don't have a formal legal structure, you'll be personally liable for your partner's actions in addition to your own.

Operating as a limited liability company, commonly called an LLC, or a corporation will shield you from personal liability. LLCs are typically easier to form and have fewer maintenance requirements than corporations. Although all states allow LLCs, some don't allow single-member or sole-owner LLCs. Check your state's government website for the specific rules.

Once you decide the legal structure, you or your attorney can file articles of formation or incorporation with your secretary of state.

2 Line up financing

Depending on the type of business, your startup costs could range from a few hundred dollars to thousands. You may need funds for marketing, contractors or inventory.

To determine what you need and how much it'll cost to start financing your new company, calculate how much you'll need to start a business, then create a brief business plan and map the associated costs. Will you finance it with your savings, help from friends and family, a line of credit or other means?

Your startup may not yet qualify for a bank loan but you may as an individual, especially if you have solid personal credit and assets. You could also tap suppliers, equipment providers or microlenders to ensure you have the cash flow you need.

3 Create applicable agreements

Creating an operating or shareholders agreement is important, especially if you have a co-founder—even if this person is a spouse or family member. Sit down and discuss what you want to do with the business, including who's responsible for which aspects of the operations and what occurs if something happens to either of you.

Create a buy-sell agreement, which goes into much more detail regarding the why, what and how of an owner exit. Do the upfront work to clarify and communicate your expectations, then have your attorney document this information in the appropriate agreements. This will help ensure your business continues to grow and thrive even if you or your partner's priorities change.

4 Get an EIN and a business account

You'll need an employee identification number, also known as an EIN or tax ID number. Contact the IRS to obtain your EIN. For most businesses, the entire application and approval process can be done online within a few minutes.

If you're operating as a legal entity, you'll need your articles of incorporation or organization. You may also need a company resolution stating that you're authorized to open a bank account for the business. Present these documents along with your government-issued identification and EIN.

Make sure to use your business bank account for all business activities. Running personal items through your business bank account can cause serious issues with the IRS and could nullify the legal protection that your legal business structure provides.

5 Obtain a business license and applicable permits

If you're conducting business locally—and if you're a freelancer or a sole proprietor—you'll need a business license from your municipality or county, depending on where your office is located. If you're unsure of your jurisdiction, check with your county's license office. The annual licensing fees are typically based on revenue generated.

You may also need permits, like a fire permit to store flammable materials onsite, health department permits for food or a liquor license if you'll serve alcohol. Permits are typically location-based and can be costly, so do your research in advance.

6 Follow all the rules

If you operate as a corporation, make sure to hold annual shareholders and board of directors meetings. For all structures, document your decisions and record any cash infusions into and distributions out of the company.

Starting a new business is an exciting leap. Use this resource as a guide—in conjunction with a solid business attorney and banker—to help you navigate the uncharted territory so you not only survive but thrive.