Go Legal Yourself!. Kelly Bagla

represents the hard work put into starting a company and trying to keep it afloat. Growth Phase:The Rook represents the castle walls, which protect the King, Queen, Bishop, and Knight. The Growth phase represents innovation as owners try to grow their business with unique confidential ideas and personnel. Established Phase:The Knight represents the professional soldier whose job it is to protect those of rank. The Established phase represents your company as being stable and known to consumers as a recognized brand. Exit Phase:The King is the most important piece in the game. If your King is captured, you lose the game. The Exit phase is the most important phase in your Business Legal Lifecycle^®, as this is the phase that sets you up for retirement or to start another venture. Without proper planning and money, you can't do either.

PART II Startup Phase

      The critical ingredient is getting off your butt and doing something. It's as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer.

       – Nolan Bushnell

      The Pawn represents the first barrier of protection. They work hard and are sacrificed. The Startup phase represents the hard work put into starting a company and trying to keep it afloat.

CHAPTER 1 What Legal Entity Should I Be?

      As a practicing business attorney for 18 years, I have heard it all when it comes to incorporating a business. Many think that incorporating their business will help them cut the federal tax bill or avoid paying state income taxes completely. First-time entrepreneurs often have misconceptions about incorporation, usually resulting from an optimistic desire for lower taxes or third-hand advice from a friend or a friend's accountant. When small business owners fall prey to some of these myths, the consequences can range from higher taxes to misunderstanding their personal liability. To gain a better understanding of these myths, it's important that you understand some of these misconceptions surrounding incorporation.

       Incorporating can help with avoiding state taxes:Those starting a business in California might be jealous of neighbors in Nevada who don't have to pay state income taxes. Many entrepreneurs believe that they can incorporate in a low tax or no tax state and their business is not required to pay any income taxes. It sounds like a great strategy but it does not work. When it comes to state taxes, it does not matter where the business is incorporated. What generally matters is where the owner operates the enterprise. Those living and running a business in California still need to pay state taxes on the income earned in California even if the company is incorporated in Nevada. Moreover, Nevada requires an annual filing of the list of officers and directors of the corporation and requires a business license. These fees can add up very quickly and outweigh the benefit of paying no state taxes.

       Incorporating protects the owner from all personal liability:Incorporating is a critical step for separating an owner from the business, but it does not absolve the owner of all personal responsibility. As the proprietor of a business, the owner can still be held personally liable for the business in several situations. If a business proprietor signs a contract in the owner's personal name, personally guarantees a loan, does not keep up with corporate compliance paperwork, or commits a crime, the owner will be personally liable.

       It's better to wait until a product is ready for the marketplace:Many small business owners prefer to avoid legal paperwork until they absolutely have to deal with it. Some believe there is no need to incorporate until they start selling a product or service. This line of thinking is wrong on two counts: First, liability issues related to a business can arise long before products hit the marketplace; for example, an employee, independent contractor, or vendor might sue the owner for related reasons. The second reason to incorporate early is related to an owner selling the company, as it's more desirable to treat the sale proceeds as long-term capital gains than ordinary income. The stock in your company must be held for more than one year.

      Make no mistake, it is critical to form a corporation for entrepreneurial activities to minimize personal liability. In some cases, these business legal entities can lower taxes, but incorporating should never be considered an easy way to avoid taxes.

      Before I explain which legal entities exist and which one would be a good fit for you, it's important to understand what exactly is a startup.

What Is a Startup?

Merriam-Webster's dictionary defines a startup as “the act or an instance of setting in operation or motion.” This is not a helpful definition to the newly formed business. The reality is that there is no one definition any two entrepreneurs or business owners agree on. Most say a startup is determined by its age, growth, revenue, profitability, or stability. Neil Blumenthal, co-CEO of Warby Parker, defines a startup as “a company working to solve a problem where the solution is not obvious and success is not guaranteed.” Another entrepreneur, Adora Cheung, CEO of Adora, stated: “A startup is a state of mind. It's when people join your company and are still making the explicit decision to forgo stability in exchange for the promise of tremendous growth and the excitement of making immediate impact.” The Small Business Association sums up the word startup, “In the world of business, the word ‘startup’ goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That's because investors are looking for the highest potential return on investment, while balancing the associated risks.”

      The best definition of a startup was provided by Alyson Shontell while she was the editor-in-chief of Business Insider US. “A startup is an emotional roller coaster that can either result in massive failure or success, after which one's bank account total may either drastically increase or decrease. The person behind a startup is a founder, an often very bright, somewhat crazy person who finds a normal 9-to-5 job dull and is deluded into believing he or she can change the world by working tirelessly in front of a computer screen. The relentless work has been known to shave a few years off a founder's life while adding premature gray hairs, but it can be very rewarding both emotionally and financially for those who pursue it.” I could not agree more with Alyson Shontell's definition.

      Now that we have a definition of what a startup is, I can answer the number one most frequently asked question in the Startup phase.

What Legal Entity Should I Be?

      When starting out, it is important to determine what form of business structure will work best for your specific situation. Choosing the best legal structure for your business requires knowledge of your line of work and understanding of local state and federal laws. The legal structure you choose for your business is one of the most important decisions you will make