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This guide contains only general information.
It is NOT LEGAL ADVICE.
Please check your state’s standards.
1. Choose the entity type
Each entity
type has its advantages and disadvantages.
Sole
proprietorship
A business is directly owned,
managed, and controlled by an individual. There is no distinction between the
business and the owner.
Advantages
- No formal
action is needed to start it (but licenses may be required for specific types
of business activities).
- It can be started and closed at any time.
- Pass-through taxation (the net income/loss is reported directly on the
owner's federal tax return).
- The owner directly controls it and makes day-to-day business decisions.
Disadvantages
- Only one person can own a sole proprietorship.
- It is not a separate entity: the owner is personally liable for the
business's debts.
- There are limited possibilities of raising investments.
General
partnership
Two or more persons co-own a
business, share profits and liabilities.
Advantages
- It can be owned
by more than one owner.
- Pass-through taxation (partners report their allocated portion of profits
directly on their individual tax returns. The partnership is, however, subject
to D.C. unincorporated business franchise tax).
- Flexibility in arranging the governance, control, and relationship between
partners through the partnership agreement.
Disadvantages
- Individual partners are personally liable (jointly and severally) for the
partnership's debts incurred after the partner's admission, and for the other
partner's acts. D.C. Code §§ 29-603.05, 29-603.06.
- Partnership taxation rules are complex.
- Since partners have equal rights to participate in the management, it may
cause conflicts. However, a clear definition of roles in the partnership
agreement may help to prevent conflicts.
Limited
liability partnership (LLP)
Each partner's liability is
limited to the invested assets.
Advantages
- Same as in a general partnership.
Additionally, limited liability partners enjoy a "full shield"
protection: they are not liable for the LLP's obligations.
Disadvantages
- Since not all states adopted LLP statutes, the special limitations of
liability of an LLP may not be recognized in all jurisdictions.
Limited
partnership (LP)
There must be at least one general
partner and one limited partner in an LP. General partners are personally
liable. Limited partners' liability is limited to their investments.
Advantages
- A limited
partner generally is not liable personally for the obligations of the
partnership. D.C. Code § 29-703.03.
- LP is a separate entity, and so can have a perpetual duration. D.C. Code § 29-701.04.
Disadvantages
- Limited partners, though have limited liability, also have limited control of
the LP.
- General partners are personally liable for the debt obligations of the LP.
Limited
liability company (LLC)
A combination of partnership and
corporation features.
Advantages
- Pass-through taxation, like a partnership (the taxation at the entity level
may be avoided).
- Members are generally not liable for the LLC's obligations.
- There is no limitation on the number of owners.
- It is simpler to operate and it does not require corporate formalities, like
corporations.
Disadvantages
- The opportunities for raising investments are limited.
Corporation
(Inc., Corp.)
An incorporated business where
owners are shareholders.
Advantages
- It is a separate entity. Shareholders are not personally liable for the
corporation's obligations (except for a limited number of situations).
- Ownership (shares of stock) can be transferred by sale or gift.
- There are more opportunities to raise investments.
- A corporation can elect to be an S-Corporation if it satisfies certain
requirements (has only individual shareholders, has not more than 100
shareholders, has only one class of stock). The shareholders in S-corporation
enjoy the pass-through taxation at their own individual level. An S-Corporation
still has to pay the D.C. franchise taxes.
- It is easier to raise investments through the stock sale.
Disadvantages
- The taxation is more complex; the profits may be subject to double taxation.
However, there may be an option for federal income taxation for
S-corporation.
- Share sale can be restricted by shareholder agreement and applicable
securities laws.
- It is more expensive to maintain and comply with laws.
- There are more formalities and paperwork concerning formation and governance.
2.
Choose
a name
Choosing a name for your
business is not only about attracting customers. It is also about avoiding
confusion and protecting the business from trademark infringement claims.
The name of your business (a trading name) can be different from the name of
the entity. For example, ABC Inc. can do business as "XYZ plumbing."
Consider
the strength of your trade name (trademark)
The
stronger your trademark is, the more easily you can prevent others from using
it without your permission. These are types of trademarks by their strength.
Fanciful
(strong)
Fanciful marks are invented words. They only have meaning in relation to their
goods or services. For example, Exxon® for petroleum or Pepsi® for soft drinks.
Arbitrary
(strong)
Arbitrary marks are actual words that have no association with the underlying
goods or services. For example, Apple® has been registered as a trademark for
computers. However, "Apple" for fruits is not unique.
Suggestive
(strong)
Suggestive trademarks are words that suggest some quality of the goods or
services, but don't state that quality outright. For example, Coppertone® for
sun-tanning products.
Descriptive
(weak)
Descriptive trademarks merely describe some aspect of your goods or services
without identifying or distinguishing the source of those goods or services.
They can be registered only if the trademark gains distinctiveness through
extensive use in commerce over many years.
Generic
(not a trademark, not protected)
Generic terms are merely the common, everyday name for goods or services. They
cannot function as trademarks, and you cannot prevent others from using the
same words. For example, "Bagel Shop" for bagel bakery business.
Check
the trade name (trademark) availability
Before
naming your business, or product line, you need to check whether another
company already has a similar name or mark. Without checking it, your customers
may confuse you with the other company, or that company may claim trademark
infringement against you.
You can check the availability in trademark databases (USPTO (https://www.uspto.gov/trademarks/search) and States trademark databases, counties "doing business
as" or "trading as" databases), on the Internet, in local areas,
maps, yellow pages, or other databases.
Consider
registering the trademark
While
trademark registration is not mandatory, it can give extra protection and tools
from infringement. It also gives you presumption over others in that the
trademark is yours. There are different levels of registration depending on the
desired scope of protection.
Common
law protection (no registration)
This is the basic protection of a trademark that you can have regardless of
trademark registration. You become a trademark owner as soon as you start using
your trademark with your goods or services. You establish rights in your
trademark by using it, but those rights are limited, and they only apply to the
geographic area in which you are providing your goods or services.
State
trademark registration
Registering your trademark in a particular state will give you protection
in that state. However, not all states have trademark databases. To check your
state, please follow this link.
Federal
trademark registration
Registering your trademark with the USPTO creates rights throughout the entire United States and
its territories, and includes your registration in our publicly accessible
database of registered trademarks. You can use the ® symbol.
International
trademark registration
You can register your trademark in multiple countries through the Madrid Protocol. While an International Registration may be issued, it
remains the right of each country or contracting party designated for
protection to determine whether or not protection for a mark may be granted.
Check
the availability of the entity's name (if it is different from the trade name)
If you are
planning to name your entity differently from the business trade name, you need
to do the name availability check at DCRA. It is important to check the entity name
availability in all states where you are planning to do business. For D.C.
businesses that will be doing business in neighboring Virginia and Maryland,
please check Virginia and Maryland's entity name availability.
If the chosen name is available, reserve it by filing the GN-3 application at DCRA or by mail, with fees. The reservation is
valid for 120 days. D.C. Code § 29-103.03(a). Make sure that the name complies with the legal
requirements, that is, includes certain words or abbreviations. D.C. Code § 29-103.01(e). For reservations in Virginia and Maryland, check https://cis.scc.virginia.gov/ (login required) and www.dat.state.md.us.
Check
the domain availability
If you are planning to use a website for your business and you want the domain name to match the business trademark, then you also need to check the domain availability. This practice is desirable to avoid cyber squatters who buy domain names with the intent to profit from re-selling them to trademark owners.
3.
Form
and register the company
Each business entity type
has its own requirements for registration.
Sole
proprietorship
No registration required.
A sole
proprietorship is not a separate business entity. It does not require
registration, though you can register a fictitious trade name ("doing business as" or
"trading as") through CorpOnline (login required). The trade name must be renewed (TN-2 form) by April 1st of every second year from the year of
registration.
General
partnership
Formed by the agreement between
partners.
A general
partnership is formed by agreement between two or more partners, which can
include individuals and corporations. D.C. Code §29-601.02. The agreement may be written, oral, or even implied.
The partnership may be formed regardless of the partners' intent to form it.
Limited
liability partnership (LLP)
File a statement of qualification.
A limited
liability partnership is formally created by filing a statement of
qualification under D.C. Code § 29–610.01 (form DLLP-1) with the DCRA. Go to CorpOnline, create a profile, access the online services main page,
and proceed. You can also submit your statement of qualification in person or
by mail.
LLP is required to file two-year reports with the Corporations Division of DCRA
to maintain good standing within the District of Columbia.
Limited
partnership (LP)
File a certificate of limited
partnership.
A limited
partnership is formally created by filing a certificate of limited partnership
under D.C. Code § 29-702.01 (form DLP-1) with DCRA. Go to CorpOnline, create a profile, access the online services main page,
and proceed. You can also submit the certificate of limited partnership in
person or by mail.
The name of the limited partnership must be distinguishable from the registered
or reserved names of other entities on the D.C. record (D.C. Code § 29-103.01) and contain the phrase "limited partnership"
or "L.P." or "LP." (D.C. Code § 29-103.02(d)). The certificate of limited partnership must state the
name and address of each general partner, state the LP' address, and be signed
by all general partners. D.C. Code § 29-702.04.
LP is required to file two-year reports with the Corporations Division of DCRA
to maintain good standing within the District of Columbia.
Limited
liability company (LLC)
File the articles of organization.
A limited
liability company is formed by delivering articles of organization (form DLC-1) with DCRA. Go to CorpOnline, create a profile, access the online services main page,
and proceed. You can also submit the articles of organization in person or by
mail.
LLC is required to file two-year reports with the Corporations Division of DCRA
to maintain good standing within the District of Columbia.
Corporation
(Inc., Corp.)
File the Articles of
Incorporation.
1. Plan.
To register a
corporation, you will need to decide on the number of shares and also who will
be the registered agent for service of process. Consider what other provisions to
include in the Articles of Incorporation (e.g., preemptive rights, stock
transfer restrictions, voting rules).
2.
Register in D.C.
File the Article of Incorporation with the reservation period and pay
the fees. This filing of the Article of Incorporation commences
the corporation's existence. The Articles must be signed by the incorporator(s)
and comply with all applicable legal requirements. D.C. Code § 29-302.02(a) (name, number of shares, registered agent for
service of process, name(s) of incorporator(s)).
3.
Register in other states.
If the corporation will be conducting business in other states, it will
need to register in each such state as a foreign corporation and have a
registered agent for service of process.
4. Hold
the meeting.
After the registration, the corporation should hold an organizational
meeting or a written consent of incorporators (or directors, if they were named
in the Articles) to adopt Bylaws, elect officers and directors, and make any
other decisions to complete the organization of the corporation.
5.
Consider a shareholder agreement.
The shareholders may also consider having a shareholder agreement to define
the relationship between shareholders, address areas of potential disputes,
define the rules of stock valuation, restrict the stock transfer.
6.
Observe corporate formalities.
To avoid the "corporate veil piercing," shareholders and the
corporation should diligently observe corporate formalities and keep their
business matters separate.
7. Hold
annual meetings or have a unanimous written consent.
The corporation should also hold annual shareholders' and directors'
meetings with all minutes recorded, or have a unanimous written consent in lieu
of a formal meeting.
8. File
bi-annual reports.
Corporations are required to file two-year reports with the Corporations
Division of DCRA to maintain good standing within the District of Columbia.
4.
Obtain
a Tax ID and Licenses
Certain business activities
are regulated by the federal or state governments. Before starting your
business, you need to check if you are required to obtain licenses.
Employer
Identification Number (EIN)
Every
separate business entity must have its own tax ID. Even if you chose to do
business as a sole proprietor, if you do not wish to expose your SSN, it is
desirable to obtain a separate employer
identification number.
Licenses
Some business activities require
federal or state licenses.
Federal licenses
You can find the
list of federally licensed business activities on the U.S. Small Business
Administration's website. For
example, maritime transportation, mining and drilling, aviation, radio and
television broadcasting require licenses and permits from federal agencies.
D.C.
licenses
For a D.C. business, you can check whether you need a license at https://mybusiness.dc.gov/ (login required). Here are examples of business activities
that may require a license: beauty, grooming, construction, laundry/cleaning,
electronic repair, lodging & rental housing, restaurants, automobile
repair, and the like.
Professional
licenses
Additionally, certain professional activities require a separate license of
the professional, such as CPA and attorneys.
5.
Manage
the Risks
Finally, to be fully
prepared to do business in D.C., you need to optimize legal protections for
your business to manage the risks of losses and liabilities.
Insurances
The insurances type and coverage
will depend on the business activities and the potential risks.
Mandatory
In some cases, insurance is mandatory. For example, workers' compensation is
mandatory for almost all employers. If you are planning to use trucks or other
vehicles, you will need to check the liability coverage requirements.
Non-mandatory
In other cases, insurance is desirable. For example, liability insurance
for sole proprietors or general partners may be more desirable because they
have potentially unlimited personal liability for the business's debts. Other
examples of insurances are professional liability, damages to property,
reputation, employer liability, and commercial liability.
Compliance
check
Depending on the business
activities, you will also need to conduct a compliance audit and monitoring.
Here are
several examples of compliance checks.
If the
business will hire employees, it is important to implement
compliant wage and hour, anti-harassment, anti-discrimination, and safety
policies and practices.
If the
business owns or rents a building or space, it is important to
make sure it is compliant with the Americans with Disabilities Act and its
Standards and is safe for customers.
If the
business deals with private information and stores data,
it is important to check compliance with relevant privacy laws and regulations.
If the
business deals with financial operations, it has to implement
policies and practices compliant with state and federal financial and/or
monetary regulations.
If the
business is a corporation, it has to comply with the securities
laws.
Other
protections
If your business uses certain
assets, it is important to protect them. Some protections may be forfeited if
not used.
Here are
several examples of other protections that you may want to consider for your
business.
For
trade secrets and know-how, you need to implement a trade secret culture to ensure that the information is carefully
designated as secret and kept in secret.
For
patentable inventions, you need to consider applying for
patents.
For
trademarks, it is important to monitor the market for
infringements and continuously maintain the strength of the mark.
Cybersecurity. To protect the data from breaches or ransomware, make sure you have up-to-date protection and necessary policies and practices in place.
