Starting a High Tech Business: Legal and Banking


Kynetx
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I'm starting a new business called Kynetx (nothing to see there yet). As I go through some of the things I do, I'm planning to blog them. The whole series will be here. You may find my efforts instructive. Or you may know a better way--if so, please let me know!

Obviously one of the things you have to do to start a business is actually set up the legal entity. This is actually easier than it first appears.

The first question is what kind of entity to set up. The two basic choices in the US are a C-Corp and a Limited Liability Corp, or LLC. One of the big differences is how the entity is taxed. C-Corps pay taxes on their own behalf. LLC's pass profits through to members who pay taxes as part of their personal returns.

There's lots of discussion about "the right choice" on the 'Net. Ultimately, if you get funding, you'll probably end up as a C-Corp due to the tax issues. But my feeling is you can start out as an LLC and switch later. LLCs are easier to set up and manage when you're just getting started. Pelle Braendgaard has called them the Ruby on Rails of legal entities.

As an aside, another legal entity that you might consider is an S-Corp. It is like an LLC from a tax standpoint, but like a C Corp from a governance standpoint--to my mind the worst of both worlds.

Some feel that switching to a C-Corp later is hard, but I have access to some pretty good business attorneys who have assured me it's just not a big deal. Consequently, I went with the LLC--it's easy and familiar.

The next step is to actually set it up. In Utah we're lucky to have the One-Stop Business at Utah.gov. I set up my LLC online--including getting my Federal employer identification number (EIN)--like an SSN for the corporation--in about an hour. The only thing you don't get is an operating agreement.

If you're not blessed with an online system for doing this, you probably want to hire an attorney to get it done. I've found that not all attorneys understand the subtleties of this process, so make sure you're dealing with one who does. I've gotten good results for as little as $500 before, so it doesn't have to be expensive.

The operating agreement (don't confuse this with the articles of incorporation, which are filed with the state) specifies how the corporation will run, who capitalizing the entity, how ownership works, etc. If there's more than just you involved, the ownership issues can be the cause of a lot of consternation and hard feelings, so it pays to get it right. An attorney is a great help here.

Once the corporation is registered and you have an EIN, you can get a bank account. Don't mingle the corporation's funds with your personal funds--it will make your life difficult at tax time. I went to Washington Mutual because they offer free business accounts. Even if you don't have funding now, put $1000 in the account so you can pay for incidental expenses.

Now you're set: you've got a legal entity and a bank account. The next step: getting a clubhouse.