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Edited by Marcia Stewart
Sixth Edition FEBRUARY 2010
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Pakroo, Peri.
The small business start-up kit : a step-by-step legal guide / by Peri H. Pakroo. 6th
ed.
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Includes index.
ISBN-13: 978-1-4133-1099-3 (pbk.)
ISBN-10: 1-4133-1099-0 (pbk.)
1. Small business Law and legislation United States Popular works. 2. New business
enterprises Law and legislation United States Popular works. I. Title.
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She received her law degree from the University of New Mexico School of
Law in 1995, and a year later began editing and writing for Nolo, specializing
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is active in supporting local, independent businesses and is a co-founder of the
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Table of Contents
Your Small Business Start-Up Companion
1
1
Choosing a Legal Structure
7
Sole Proprietorships 9
Partnerships
12
Limited Liability Companies (LLCs) 18
Corporations 21
Choosing the Best Structure for Your Business 26
2

Pricing and Billing for Service Businesses
94
Bidding and Creating Proposals
98
Pricing for Businesses Selling Products
101
6
Federal, State, and Local Start-Up Requirements
105
Step 1: File Organizational Documents With Your State
(Corporations, LLCs, and Limited Partnerships Only)
107
Step 2: Obtain a Federal Employer Identification Number 108
Step 3: Register Your Fictitious Business Name 110
Step 4: Obtain a Local Tax Registration Certificate 114
Step 5: Obtain a State Seller’s Permit 116
Step 6: Obtain Specialized Licenses or Permits 116
7
Risk Management
119
Who Might Sue or Be Sued
120
Risk Management Strategies
126
Insurance and Warranties
129
8
Paying Your Taxes
137
Tax Basics

181
Electronic Contracts 182
11
Bookkeeping, Accounting, and Financial Management
187
Accounting Basics
189
Cash vs. Accrual Accounting
192
Step 1: Keeping and Organizing Receipts
194
Step 2: Entering Receipts Into Bookkeeping Software
196
Step 3: Generating Financial Reports
199
12
Small Business Marketing 101
209
Defining Your Market
210
Learning About Your Market: Market Research 215
Cost-Effective Marketing Tools
219
13
E-Business: Selling and Marketing Online
227
Defining Your Strategy and Goals
229
A Website: Your Online Base Camp
232

268
Sample Buy-Sell Provisions
269
15
Building Your Business and Hiring Workers
279
Employees vs. Independent Contractors
280
Special Hurdles for Employers
282
Hiring and Managing Staff
284
16
Getting Professional Help
287
Working With Lawyers
288
Working With Accountants and Other Financial Professionals
291
Internet Legal Research
292
Appendixes
A
Small Business Resources and State-by-State
Contact Information
295
Small Business Start-Up Information
297
State Tax Agencies
299

Application for Employer Identification Number (IRS Form SS-4)
Instructions for Form SS-4
Determination of Worker Status for Purposes of Federal Employment Taxes and
Income Tax Withholding (IRS Form SS-8)
Election To Have a Tax Year Other an a Required Tax Year (IRS Form 8716)
Entity Classification Election (IRS Form 8832)
Index
339

Your Small Business Start-Up Companion
Y
ou don’t have an MBA. Hell, you’ve never
taken a business class. You spent your
college years studying literature and art
history, and periodically dropping out to travel the
world. And now you find yourself thinking about
going into business for yourself—maybe restoring
antiques, illustrating books, running a café, or selling
software. “Me, a businessperson?” you skeptically
wonder. You keep trudging to work each morning,
but as the hours tick by you find yourself fantasizing
more and more about kissing your 9-to-5 job
goodbye. You jot down some notes, work out some
kinks in your plan and continue to wonder whether
it just might fly….
Unfortunately, most people who have toyed
with business ideas this way never get to find out
whether they would have worked or not. For a
variety of practical, financial, and psychological
reasons, most folks just don’t take the leap from

pay me for my footage. Friends thought I should
go into business selling the stock footage I had
collected, but I didn’t know if I could make a
living doing it. I didn’t know anything about
the stock footage business. There were a few
companies doing it, but they were in New York
or LA, and they seemed really huge.
But since I liked working with images and
since the business had already started to take off
on its own, I decided to formalize it. I wanted an
interesting company name that conveyed what
I did. We came up with Oddball. It’s a word that
people don’t really use anymore, more of a ’40s
or ’50s expression—an oddball is someone kind
of weird, unbalanced, or unusual, you know?
At the most basic level, my business involves
finding, organizing, and preserving historical
footage. And then distributing it. Our clients
include ad agencies; news organizations; docu-
mentary and feature filmmakers; industrial,
corporate, and music video producers; edu-
cational filmmakers; and anyone who needs
offbeat and unusual images. In one way, we’re
like a library: We archive and license historical
visual information.
These days, I spend most of my time trying
to organize and publicize my business. We just
launched our website, and that takes time to
maintain. And I spend a lot more time trying to
obtain films than actually looking at them. Still,

but by no means do you need any special skill,
education, or experience. As long as you do a bit of
homework and arm yourself with an overview of the
process (as you’re doing by reading this book), you’ll
be able to meet all the small business registration
requirements without breaking a sweat.
You can usually start a sole proprietorship
(the legal term for a one-owner business) or a
partnership (a business with more than one owner)
by registering with just one government office. And
for business owners who want protection from
personal liability for business debts—often referred
to by the legal jargon “limited liability”—the simplest
corporations or limited liability companies (LLCs)
require only a couple more registration tasks to
complete. In other words, once you’ve got your
business idea developed to a certain degree, all you
need to do is visit a few government offices, fill out
some forms, and pay some fees—and suddenly your
idea will have become an actual, legitimate business.
Keep in mind that there’s certainly a lot more to
launching a successful small business than dealing
with bureaucratic requirements. For starters, you’ll
need to have a sound business idea, and you’ll need
to be able to develop good management skills to
guide it to success. This book, however, largely
leaves these issues for other resources to cover.
Unlike many other small business guides, we’re not
going to spend your precious time quizzing you on
whether you have the right personality to be your

include insurance, taxes, contracts and agreements,
marketing (including taking your business online),
and bookkeeping, accounting, and financial
management (with cash flow projection and other
useful worksheets included on the CD-ROM
that comes with this book). Though they’re not
exactly start-up requirements, they’re important to
understand in the dawning days of your business
so that you’ll be able to handle them later when
business is fast and furious.
2
|
THE SMALL BUSINESS STARTUP KIT
Finally, keep in mind that businesses with
employees have significant additional responsibilities.
Chapter 15 offers a general overview of the laws and
regulations that govern businesses with employees.
If you’re thinking about hiring employees, that
chapter will help you figure out if you’re ready to
tackle the many requirements that come with your
first hire. Chapter 15 also explains the difference
between employees and independent contractors—
an important distinction, because using independent
contractors does not subject you to most of the
laws that apply when you hire employees. If you
decide that you need to hire any employees, you’ll
probably need to do further reading. An excellent
and exhaustive resource is The Employer’s Legal
Handbook, by Fred S. Steingold (Nolo).
One of the main ideas to take away from this

own show. The bottom line: Think hard, keep your
mind open—and fight like hell to make your ideas a
reality.
Take the leap.
YOUR SMALL BUSINESS STARTUP COMPANION | 3
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free legal in
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specific legal problems. Here are some of the most
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Business Plans
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A fast, easy way to generate the plan you need to
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How to Write a Busi
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by Mike McKeever
Explains how to write a business plan, whether
for your own purposes or to attract money from
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rs or i
nvestors—including how to evaluate the
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and find potential sources of financing.

How to Write a Business Plan, and Marketing Without
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Running a Side Busi
ness:

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by Ri
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Have the drive but need the “know-how” to start and
run a side business (while working full time)? Find
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Save You
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Packed with the ideas, strategies, and lessons that
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Forms of Ownership
Business Buyout Agreements:
A Step-by-Step Guide for Co-Owners
by Anthony Mancuso and Bethany K. Laurence
Explains how to protect your business interests
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for what happens if you or a co-owner leaves the
company. A must for any new business with more
than one owner.
Form Your Own Limited Liab

Explains the basics of limited liability companies,
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Form a Partnership: e Comp
lete L
egal Guide
by Denis Clifford and Ralph Warner
Describes the legal and practical issues of creating a
partnership—including financial and tax liabilities,
contributions and distributions, and changes in
ownership.
Intellectual Property
Trademark: Legal Care for Your
Business & Product Nam
e
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e information and forms you need to choose a
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Marketing
Marketing Without Advertising: Easy Ways to Build
a Business Your Cust
omers Will Love & Recommend
by Michael Phillips and Salli Rasberry
Explains the secret of attracting customers
without pricey ads—including how to build trust
with potential customers, encourage customer
recommendations, improve customer service, list
products and services widely and inexpensively, and
use the Internet to market services and products.
Tax

Working With Independent Contractors
by Stephen Fishman
Explains all the tricky IRS rules and provides forms
and instructions for hiring independent contractors.
YOUR SMALL BUSINESS STARTUP COMPANION | 5

Sole Proprietorships 9
Pass-rough Taxation
9
Personal Liability for Business Debts
11
Creating a Sole Proprietorship
12
Partnerships
12
General Versus Limited Partnerships
12
Pass-rough Taxation
13
Personal Liability for Business Debts
13
Partnership Agreements
14
Limited Liability Companies (LLCs)
18
Limited Personal Liability
18
LLC Taxation
19
LLCs Versus S Corporations

only owner, then a partnership is obviously not
your thing. (A partnership by definition has more
than one owner.) And if your business will engage
in risky activities (for example, trading stocks
or repairing roofs), you’ll want not only to buy
insurance, but also to consider forming an entity that
provides personal liability protection (a corporation
or a limited liability company), which can shield
your personal assets from business debts and claims.
If you plan to raise capital by selling stock to the
public or want to give your employees stock options,
then you should form a corporation.
If you’ve considered these issues, then you’ll be
ahead of the game in choosing a legal structure that’s
right for your business. Still, you’ll need to consider
the benefits and drawbacks of each type of business
structure before you make your final decision.
In all states, the basic types of business structures
are:
•soleproprietorships
•partnerships(generalandlimited)
•limitedliabilitycompanies(LLCs),and
•corporations.
To help you pick the best structure for your
business, this chapter explains the basic attributes of
each type.

Stephen Parr, owner and director of Oddball
Film and Video, a stock footage company in San
Francisco, California:

while. Keep in mind, however, that just because it
may be possible doesn’t mean it’s the best option.
Often, formally registering your business can benefit
you, the owner, as well, since you can then write off
business expenses and reduce your personal taxes.
In Chapter 8, we discuss hobby businesses in more
depth, including how tax laws deal with businesses
that continually lose money.
If you’re not sure whether you want to register
your business and open it up to the world of
government regulations, the information about
registration requirements in this book will put you in
a better position to make a decision. Chapter 6 walks
you through the many governmental requirements
that apply to all new businesses, and explains how
to go about finding and satisfying any additional
requirements that may apply to your specific
business.
CHAPTER 1 | CHOOSING A LEGAL STRUCTURE | 9
This chapter will also help you answer the
most common question new entrepreneurs ask
about choosing a business form: Should I choose
a business structure that offers protection from
personal liability—a corporation or an LLC? Here’s a
hint as to what the best advice will be: If you focus
energy and money into getting your business off the
ground as a sole proprietorship or a partnership, you
can always incorporate or form an LLC later.
Limited Liability
One basic distinction that you’ll probably hear

proprietorships are easy to set up and to maintain—
so easy that many people own sole proprietorships
and don’t even know it. For instance, if you are a
freelance photographer or writer, a craftsperson
who takes jobs on a contract basis, a salesperson
who receives only commissions, or an independent
contractor who isn’t on an employer’s regular payroll,
you are automatically a sole proprietor. This is true
whether or not you’ve registered your business with
your city or obtained any licenses or permits. And it
makes no difference whether you also have a regular
day job. As long as you do for-profit work on your
own (or sometimes with your spouse—see “Running
a Business With Your Spouse,” below) and have not
filed papers to become a corporation or a limited
liability company, you are a sole proprietor.
CAUTION
Don’t ignore local registration require ments.
If you’ve started a business without quite realizing it—for
example, you do a little freelance computer programming,
which classifies you as a sole proprietor by default—
don’t let the fact that you’re technically already a sole
proprietor fool you into thinking that you’ve satisfied the
governmental requirements for starting a business. Most
cities and many counties require businesses—even tiny
home-based sole proprietor ships—to register with them
and pay at least a minimum tax. And if you do business
under a name different from your own, such as Custom
Coding, you usually must register that name—known
as a fictitious business name—with your county. In

your sole proprietorship without being classified as an
employee, freeing the business from paying payroll tax.
at saves you money—and, if you have no
other employees, also allows you to avoid the time-
consuming record keeping involved in being an
employer. Similarly, a spouse who is not classified as a
partner or an independent contractor won’t have to
pay self-employment taxes, and your business won’t
have to file a partnership tax return.
Also consider that under marital property laws that
vary from state to state, if a business is started
or significantly changed when a couple is married,
both spouses may have an ownership interest in the
business regardless of whose name is on the ownership
document.
If you are concerned about the possible conse-
quences of divorce, read Chapter 14, “Planning for
Changes in Ownership.” It discusses how divorce and
other life events such as retirement and death can
affect ownership of a business and explains how to
plan in advance to accommodate the possibilities.
You may also want to check with a lawyer who is
experienced in handling marital property issues to see
how your business could be affected in the event of a
divorce in your particular state.
Finally, if you and your spouse both want to be
active partners in a co-owned business—each with
an official say in management—you should create a
partnership or an LLC or corporation, even though
this will mean filing somewhat more complicated