Sunday, March 4, 2007

Starting a Business in Indiana - Generally, Part I

First thing, get a lawyer. Second, get an accountant. Probably not the orthodox view but I think it is the practical thing to do.

I have a friend who is a certified public accountant. A very bright fellow who patiently listens when I rant about accountants setting up corporations. My rant centers on the essential difference between accountants and lawyers. Accountants worry about taxes. Lawyers worry about liability and the possibility of litigation. I suppose that makes lawyers sound like a dour crew. Perhaps we are when it will be us who must fend off the litigants.

Concentrating on income tax issues does not necessarily result in the entity best suited to protect against personal liability or fitting the best form to the business function. I candidly admit the reverse is also true. Which is why if you are starting a business, you must have both an attorney and an accountant.

Bring a business plan. I take my start up clients much more seriously if they have a business plan. There are web sites and software claiming to create a business plan. At bottom, a business plan tells the world (well, those who see the plan) what your business will be about, how you will get from idea to product (or service), and how then keep the business running. A more formal description might be as follows: the idea that your business will encapsulate, why this idea is a good business, what you need to get the business started, how you intend to market the business and so keep it running, and where you intend to be with the business in five years. A business plan must show that you have considered the down sides and negatives as well as promote the positives of the idea. Indeed, that may pose the biggest problem for the entrepreneur - to acknowledge problems with his plan. Your accountant and attorney can give you objective criticism of the plan which is why you need to bring the plan to them.

Legal issues for starting a business depends on the type of business. I do not mean the following to be an exhaustive list of issues which need to be addressed with a lawyer:

  1. The need for investors (which will influence the type of legal entity for the business).
  2. The need for a manager (which will also influence the type of legal entity).
  3. Income tax issues.
  4. Sales tax issues.
  5. Property tax issues.
  6. Government permits.
The Corporation Division of the Indiana Secretary of State has a FAQ on the different type of entities for a business. That page can be reached through this link. As far as it goes, the information is good. I will point out that a sole proprietorship and a partnership are not going to be recommended by very many attorneys - they both pose problems of personal liability. Personal liability meaning that one's assets are on the line and not just the business assets. I think that I ought to point out (as I do when meeting with clients) that a subchapter S corporation is a creature of the Internal Revenue Service. Indiana law recognizes only for-profit and not-for-profit corporations. I think the Corporation Division's FAQ muddles these distinctions.

Next time I will dig into the differences and uses of the different business entities.