Got a big idea for a new business? Well then, you need the Big 4: an accountant, insurance agent, attorney and banker. A successful business launch involves many details that require professional expertise. The Big 4 enables entrepreneurs to turn their business ideas into reality.

Before opening their doors, new companies need to lay a foundation for operations, which includes the legal documents to establish a business identity, organizational structure and taxation.

“Anytime we’re creating a business entity, we’re always thinking through how an entity is going to be formed and also the tax designation you want,” says attorney Jim Ledvina, of the law firm of Conway, Olejniczak & Jerry, S.C.

The structure of an organization depends on its activity, number of owners and their goals.

“There are lots of ways to structure the entity, depending upon what folks are trying to accomplish,” Ledvina says.

Proper classification

New businesses typically fall into two categories, a limited liability company or domestic corporation. For Ledvina’s clients, LLCs are the most popular business classification by far.

“The reason is that LLC is significantly more flexible in terms of the management and control. The administrative requirements are not nearly as demanding as a corporation,” he says. Corporations are required to appoint officers and hold annual shareholder meetings and annual board of director meetings.

“That’s all very rigid in corporate law, versus an LLC, in which you can create any type of management structure you want,” he says.

The second aspect to consider when launching a business is its tax classification. An LLC with a single owner falls under the disregarded entity status. Basically, the LLC is not taxed as a separate entity by the Internal Revenue Service, so the business owner doesn’t file a separate business tax return. All income and expenses flow to Schedule C of the owner’s 1040 form.

“It’s all very simple,” Ledvina says, and he means it. An LLC with a single owner is one of the simplest business structures that exist. When a business has two or more owners, it defaults to partnership tax status. However, the members of the LLC can elect to have their LLC treated as an S corporation or C corporation for tax purposes.

An S corp has a “flow-through” tax designation. Thus, the business entity files an informational return, and income and loss “flow through” to a business owner’s 1040 via a K-1 IRS form. The percentage of ownership determines the share of the income or loss attributed to each owner. For an S corp, business owners pay tax at the individual level and not the entity level.

From a tax standpoint, it’s rare to have a C corp because of what’s known as the “double tax.” With a C corp, the entity pays tax. However, if the owners want to make distributions as a dividend, the owners would be taxed on the dividend. Although tax legislation enacted in 2017 addressed the double tax, Ledvina says there’s still more benefits being an S corp than C corp.

S corp owners can avoid some payroll taxes when making distributions. In addition, S corps offer other tax benefits, depending on the activities of the entity. It’s wise to consult an attorney and an accountant for advice.

Drafting documentation

Both LLCs and corporations require a set of legal documents before the businesses open. A corporation files Articles of Incorporation, whereas an LLC files Articles of Organization. A corporation drafts bylaws and a shareholder agreement, while an LLC drafts an operating agreement.

While the articles and bylaws are fairly standard and straightforward, the shareholder agreements and operating agreements differ significantly based on the entity. These agreements cover the management and control of the business. For example, an operating agreement outlines how decisions are made, who’s in control, who represents the business, and how an owner can sell his or her ownership interest in the entity.

“It’s not one size fits all. You might have silent partners, active partners or individuals who want to be bought out,” Ledvina says. “You want to make sure you’re covering all the bases with documents that work appropriately for the business.”

Another legal document needed to open a business is an Employer Identification Number. Entrepreneurs will hit a roadblock at the bank if they don’t have an EIN. Banks require a business to obtain an EIN before opening a business banking account. Anyone can apply for an EIN at the IRS website at no cost. Obtaining an EIN is probably the simplest part of opening a new business.

In addition to filing for an EIN online, entrepreneurs can find sample legal documents on the internet. Entrepreneurs can do their own paperwork, but Ledvina advises against this, based on his experience. In one instance, a client brought Ledvina an operating agreement with language associated with real estate when the entity didn’t own any real estate.

“The language associated with valuing the real estate entity is going to be totally different than an operating entity,” he says. “There’s a big difference in how we draft the two.” Because opening a business involves complex legal details, an attorney plays an important role. Ledvina recommends working with an attorney who specializes in business law.

“You want somebody with a little bit of experience. They know what to look out for, and they know the issues and where the pain points may be,” he says. “If you have something complex, like multiple owners or unique situations, you might want to interview a couple of attorneys. Ask them about their experience and about the pros and cons of different types of entities.”

Finances and accounting

Once you select your legal adviser, he or she will be able to recommend other members of the Big 4.

A local financial institution can provide a startup loan and a line of credit to support ongoing operations. Banks also provide financial services needed to pay employees, pay bills, receive payments, etc. A local insurance agent helps business owners mitigate risk with commercial general liability insurance and worker’s comp insurance. An accountant can set up sales tax, use tax and employee tax withholding. Plus, accountants file taxes and ensure their clients comply with tax laws.

“If you make a mistake, especially on sales tax or payroll taxes, that’s almost always a deathblow to an entity because the penalties and interest associated with those taxes are incredibly onerous,” Ledvina says.

Opening a business is a complex process, especially when it comes to paperwork. Consulting with an attorney, accountant, insurance agent and banker can help you determine the best trajectory for your new business. These professionals’ knowledge about tax implications and the federal and state requirements for startups is invaluable for a new business. A Big 4 will help you set up your business to succeed.