Early Stage: Step 5 – Forming the entity

27 Jan Early Stage: Step 5 – Forming the entity

Editor’s note: This is the fifth in a series of articles on developing start-up companies in the technology or biotechnology sectors.

Madison, Wis. – By now you have clarified what your intellectual property is – the domain name, trademarks, etcetera. You are now prepared to form an entity. In this column, we will discuss the entity choices you have and the ones that you might find most useful at this early stage.
In today’s landscape, there are several entity choices: sole proprietorship; partnerships – general, limited, and limited liability; corporations – C-corporation and S-corporation; and limited liability companies.
The most recent Wisconsin statistics show that, by an overwhelming four-to-one margin, the entity of choice for new companies is the limited liability company or LLC. The reason is that limited liability companies combine the aspects of limited liability with partnership tax treatment. While general and limited partnerships and sole proprietorships have favorable tax status, they do not have comprehensive liability protection.
On the other hand, corporations, both C and S, have favorable liability protection but have less favorable taxation. S-corporations may be a choice in some instances, but the S-corporate tax is not as advantageous, in the author’s opinion, as is partnership taxation.
Before getting into any specific details, one other key aspect of this entity decision is that with the “next economy” legislation passed in 2002, you can merge and convert entities easily from one form to another. In other words, limited liability companies and corporations can be mixed and matched depending on the circumstances.
Thus, if you started out as a limited liability company, you can become a C-corporation or S-corporation. Conversely, you can go from being a C-corporation or S-corporation to an LLC (although it is not well advised from a tax point of view).
Simply put, if you start out as an LLC, you have your best chance of success from an entity viewpoint.
Online formation
Why are LLCs the most popular form of choice for new companies? For one thing, they can be formed online for $130 by the owner. One merely has to go to the Wisconsin Department of Financial Institutions’ website, then click on “Form an LLC,” and follow the steps. The DFI will send you a confirmatory e-mail, which should be kept to verify that the entity has been formed.
The date-stamped “Articles of Formation,” whether they are for corporations, limited liability companies, or other entities are really the entity’s “birth certificate.” They indicate the date and the time the entity was formed. From that point on, the entity can conduct business.
To form corporations, you can also go online to find the Articles of Incorporation forms. At this time, however, the DFI does not accept online filing, so you must fax the documents in to the department and follow the instructions on its website.
DFI to IRS
Once you have formed the entity, there are several other key steps to commence business. First, you need to get a federal employer identification number. This is accomplished by submission of an SS-4 application to the Internal Revenue Service, which can be done online at the IRS website. On this site, click on “businesses” in the left-hand column, and when the next screen appears, click on “employer id numbers” in the left-hand column. At the next screen, click on “apply online” and when the next screen appears; click on “Apply Online Now.”
(Access to the instructions for completing the SS-4 also will appear at this screen.) The next screen will produce an SS-4 application, which now can be completed and submitted immediately via the Internet. You will then receive confirmation of the submission, as well as your federal employer identification number.
You may also need to complete business registration forms for the State of Wisconsin. These can also be submitted online at the Wisconsin Department of Revenue website. Once the screen appears, you have a selection of forms to choose from, including forms for business tax registration, limited liability company registration, and sales and use tax forms.
Next, you open a bank account using a copy of the Articles of Formation and the federal identification number.
You must get comprehensive business insurance for your type of business, and you should see a qualified business insurance agent to get advice on this item. One type of insurance you must have is worker’s compensation.
The next step is completing other legal formation details, including unemployment compensation and worker’s compensation.
Previous articles by Joe Boucher
• Gina Carter: Intellectual Property: Are you an “infringer?”
• Joe Boucher: Early Stage, Step 3: Naming the entity
• Joe Boucher: Early Stage Step 2: Choosing a domain name
• Joe Boucher: Starting a tech business? Step 1 is minding the intellectual property
• Joe Boucher: Madison is flourishing while Marinette is dying