Opening a New Business in Arkansas Part 1
There is a right way and a wrong way to set up a new business. You may have a million-dollar idea, but if you do not start your company in the proper way even a great business can cause you a whole lot of headaches.
To get things started on the right foot, at a minimum you should generally follow the steps outlined below, and it is strongly recommended that you consult with an attorney and an accountant on the front end.
1. Form an Entity
One of the most common mistakes that come up with new businesses, particularly from first-time business owners, is a failure to create a distinct business entity. Establishing a separate entity can have substantial impacts on both your tax and personal liabilities. If you are operating a business without forming a separate entity, then you will likely be responsible for any debts or liabilities incurred by the business. Consider this example: Jim begins a small landscaping business. While mowing, Jim slings a rock that strikes a jogger causing significant injuries. Jogger then sues Jim for his negligent actions. If Jim’s landscaping business is established as a separate entity, then he may be able to shield his assets (e.g. home, vehicle, personal bank accounts) from any liability in this lawsuit. If he has not done so, then his assets will be subject to any judgment from the lawsuit. This type of risk is why even a small business should take appropriate actions early on to establish a separate entity that will help provide liability protection.
In Arkansas, there are several types of entities that can be formed. These will be explained in more detail in Part 2. The Sole Proprietorship (one owner) and General Partnerships (two or more owners) are the default entities and they provide no liability protection. If you are seeking to have some sort of protection (and you very likely should) then you can form a Corporation, LLC, or Limited Partnership.
2. Register Fictitious Name (optional)
Many businesses do not operate under the name of their registered entity. For example, John Doe’s Landscaping Company, Inc. may wish to operate as John’s Lawns. If your company falls into this category, then you will need to also register your fictitious name (in the example that would be “John’s Lawns”). Failing to register your fictitious name, or d/b/a, can expose you to liability issues as the unregistered d/b/a could be considered a sole proprietorship or partnership.
3. File for Tax I.D. Number (E.I.N)
Your entity will likely need to get its own federal and/or state tax I.D. number, a.k.a an Employer Identification Number. These may be required before you can begin certain basic operations, e.g. opening a separate bank account for your company. But establishing the E.I.N will also assist you and/or your accountant in handling your tax and payroll matters.
4. Ensure You Have Necessary Licenses/Permits
If you are planning to work in certain specialized industries then you likely know your basic licensing requirements. However, it is important to know that licensing and permit restrictions stretch far beyond those businesses. National studies have indicated that today approximately one in three U.S. workers require some sort of government permission to perform their occupation. These often come in the forms of occupational licensing and business permits. Before you begin operating a business, you should inquire with local and state entities to ensure that you do not need a specific license or permit to operate.
5. Establish Internal Policies
If you have employees or anticipate having employees in the future (even if you have none at this time), you should begin developing legal and appropriate internal business practices. Compliance with applicable employment and safety laws/regulations will be more easily established on the front end than having to change bad habits or practices later on. The last thing you want is to find your growing company crippled by a preventable lawsuit arising from misconduct within your operation. It may seem unnecessary to a new company, but taking early action to develop sound internal policies can save substantial time and resources down the road.