Welcome to the DjaoDjin Blog!

A place to share experiences in building Software-as-a-Service.

Business Anatomy

by Sebastien Mirolo on Mon, 7 Jan 2013

[UPDATED] A physical person is made of limbs and organs each with a dedicated function. Amonst them, the heart, by pulsing blood through the body at regular intervals, defines life and death. In a shortcut analogy, bussiness law organize companies as moral entities with roles and procedures and, if anything, financial statements and taxes give the pulse of a company.

It is recommended to speak with professionals before starting and in the course of running a business. This article presents findings, pointers and lingua franca that any business person will have to get familiar with. Even if this article focuses on corporations, it is also relevent in the broad lines to other business entities.

Documents

There is an interesting related project here.

Accounting and Taxes

  • stock ledger
  • general ledger
  • accrual or cash accounting
  • double-entry bookkeeping system
  • tax registration certificate

Roles

  • Stockholder
  • Director
  • Officer
  • Employee

Procedures

As long as the corporation has a defined set of procedures (corporate bylaws), and a traceable record of documents showing the defined procedures have been followed in accordance with local, state and fedral laws, officers typically enjoy the limited liability benefit associated with a corporation. The procedures, either in the bylaws or through other documents, should cover the mechanisms of

  • Issuing stock
  • Amending articles of incorporation and bylaws
  • Authorization of directors and corporate officers
  • Meeting of directors and shareholders
  • Decisions requiring directors or shareholders approval
  • Recording of Financial Transactions

Example of corporate bylaws and example of meeting minutes

.

Capitalization

First, the corporation needs to be adequately funded to protect the limited liability of directors and officers. Second, the initial capitalization of the corporation and subsequent cash transactions will be categorized differently for tax purposes. For both reasons, it is recommended to capitalize the corporation with enough cash to support itself until the estimated break-even point.

Budgets will include

  • Goverment filing fees
  • Corporate legal records (seal, certificates, leggers, printer, etc.)
  • Infrastructure servers (mail, web, etc.)
  • Travels and other marketing expenses
  • Health insurance
  • Postal address
  • Phone number
  • Bank account
  • Minium taxes

Timeline

First days

  • File the "articles of incorporation" with the Secretary of State.
  • First meeting of directors
    • Adopt the corporate bylaws
    • Adopt an official stock certificate form and corporate seal and stock ledger
    • Appoint corporate officers
    • Adopt election for S-corporation (IRS form 2553)
    • Designate fiscal year dates and accounting basis
    • Authorize the officers to execute Stock Purchase Agreement and Technology Assignment Agreement
    • Authorize the officers to open a bank account
  • First actions of officers
    • File Statement of Information (California Secretary of State form SI-200C within 90 days).
    • Federal tax registration certificate to apply for an Employer Identification Number (EIN), (IRS form SS4)
    • Issue stock certificates to the initial owners (shareholders) of the corporation and file a Notice of Exempt Offering of Securities (SEC form D) and a Limited Offering Exemption Notice (California Comissioner of Corporations LOEN).
    • Obtain any licenses and permits that are required (ex. sales tax permit)
    • Open a business bank account. This will require the business entity number and EIN.
    • Execute the Technology Assignment Agreement that results in transfering ownership of intellectual property to the business and, most important, funds in the business bank account.

First Contractor and First Employee

As business expand there is decision to be made: Hire a contractor or hire an employee.

Contractors

  • Have contractor file form W-9 (Request for Taxpayer Identification)
  • File IRS form 4419 to receive a Control Code (TCC)
  • File 1099-MISC with IRS
    • online: use your Control Code and a service provider (ex. esmartpayroll)
    • by mail: file form 1096 to IRS
    • Send copy of 1099-MISC to contractor at the end of year.

Employees

  • File employment taxes registration (Employment Development Department, form DE1)

  • File federal unemployment tax registration
  • File Withholding W-4 form 941
  • Post Employee pamphlets and notices

Keeping up with all legal regulations related to employees can be quite challenging. Most of the time, it is better for a small business to outsource H.R. compliance to a third-party (ex. zenpayroll, trinet)

Health Insurance

The question of Health Insurance is an important one to consider early on.

  • HSA accounts
  • Personal Health Insurance (ex. Anthem)

Every year

  • annual meeting of stockholders
  • annual meeting of directors
  • File Statement of Information (California Secretary of State form SI-200C, no later than month of incorporation).
  • File Federal Franchise Tax and Income Tax (IRS form 1120S)
  • (File California S Corporation Tax Return, California Franchise Tax Board Form 100S)
  • Issue each shareholder a Schedule K-1.

Random Notes and useful resources

Registering a DMCA Agent

Shareholders, directors and officers which are not involved in dayly activities of the company will complicate most legal requirements by goverment agencies. It is almost guarenteed an officer will be considered an employee of a corporation for tax purposes.

The accounting method (accrual or cash) is set at the first meeting of directors. Accrual is almost guarenteed to be required by later investors unless cash accounting is thoroughly justified to make sense for the business.

California authorizes one director, one officer and they can be the same person.

Who do I need to contact to start a business? Sites like nolo, findlaw, thestartuplawyer (7 legal documents for startups) and The LLC expert are great entry points. Government websites are also just plain amazing. You can browse the complete California statute law and get detail procedures and wonderfully written FAQs from the California Secretary of State, California Franchise Tax Board, Employment Development Department, the Internal Revenue Service and the U.S. Securties and Exchange Commission. Useful one stop help is also available at CalGOLD, the Office of Small Business Development and the North American Securities Administrators Association.

There are companies that offer to build your own corporate seal (ex: corporateseal.com) and print your own marketing materials (ex: overnightprints.com). There are also websites that offer pre-packaged incorporation kits such as legalzoom.com for example.