On forming the legal entity of your business, you will need to obtain a tax ID code from the IRS. A corporation is like having a separate person to account for with respect to the state and federal government. The corporation will have regular tax and reporting obligations even it has no source of revenues. You will need to request an EIN number from the IRS; this is like a SSN for a company. The EIN is to be your Tax ID for all future filings. Your legal or finance advisor can help obtain the EIN and help with all of future filings. It is not recommended that you manage all of the tax filings yourself. You are likely to get notes from the state or IRS telling you missed dates, the estimated tax or paid taxes are not correct, or other notes not so pleasant.
When you form a corporation or a LLC, you will have ownership that will be represented by issuances of shares. These shares reflect your fractional ownership of the business. For example, if you and your partner own half of the issued shares each, you each own half of the company. The control of the company is 50:50 as well and the voting of the shares will carry equal weight; unless you have created a structure defining different classes of shares with different voting rights. Keep in mind that when you have critical decisions they are often put to a vote by the shareholders. A 50:50 ownership could result in ties unless you have other arrangements in advance to break such ties. How you divide the shares and structure the control of the company will be an important consideration. Most of the structural issues can be changed later by your legal representation; at a cost.
Following the formation of the company, a Board of Directors needs to be selected. Yes, you will need one. If you thought you would not have a Boss, guess again! Most everyone has a Boss of some type. The Board of Directors has the responsibility of oversight of the company and the responsibility of oversight and direction of the Senior Management. This is often done by review of activities and setting milestones for management to achieve. They review the finances and ensure accuracy in reporting and spending. The Directors have a legal responsibility to ALL investors to ensure proper and ethical management of the company. They will be your Boss.
The members of the Board of Directors are elected by the shareholders, on the first day of formation of the company you may be the only shareholder and own 100% of all issued shares. But as investments are made and shares issued to new investors, your percent ownership will be reduced. Don’t be surprised if your 100% ownership eventually drops to 10% or less as you get funds from selling shares. This means the Board will have a stronger representation from the investor pool and that your Boss has stronger connections to new Shareholders than to you. Please do not get hung up on DILUTION. Suffice it to say, it is better to have 10% of a lot of money than 100% of nothing.
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at [email protected] or contact him via company contact info in the website. More Startup information is contained in his personal blog.