Other Formation Considerations
After establishing the business entity, the owner will have to apply to the Internal Revenue Service for an employer identification number (EIN). This is the identification number the business will use on all of its bank accounts, as well as on all of its income and employment tax filings.
In addition, in each state in which the entity will be doing business, you will have to apply to the state's tax department for a sales tax identification number and register with the state's labor department.
Other legal issues also should be considered. In particular, the owner should determine whether he needs a license to conduct the business, whether the business can be operated at its intended location under local planning and zoning laws (especially important if it is a home-based business), and whether contracts with consumers must take a particular written form.
Consumer contracts are likely to be the subject of special state legislation where an area has been marked by past abuse (e.g., home improvement contracts). Where applicable, to be valid, the contract may have to be in writing, contain certain disclosures, and be voidable by the consumer for a fixed period (typically three days).
However, state laws vary widely in these respects. The state's consumer protection department or a professional organization (e.g., a contractors' association) usually can provide information on any special requirements that must be met for consumer contracts.
For the actual process of forming the business entity, adequate record keeping is essential if the owner is to avoid the piercing of the veil of limited liability. Proper recordkeeping should begin even before the entity is formed. Moreover, the formation of a business entity involves important estate planning and securities law issues. Plus, strategies can be employed in structuring and funding the business enterprise, so as to limit personal and business liability.
Finally, the importance of a sound business plan cannot be overlooked. The business plan should include projections related to the market and competition, sales, expenses, breakeven point and required resources.
Clearly, the business can be adequately and carefully funded only if projections are made of the required resources. These types of projections also are essential if the entity is to avoid an accusation that asset transfers from the business to the owners were fraudulent. Similarly, these projections are important in defeating allegations that the entity was fraudulently capitalized.
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