Starting a clothing line is similar to starting any other business; there is more to it than what meets the eye. When starting a company, before you officially do business, you want to make sure you have all your bases covered. The kinds of things you want to make sure you cover are any liabilities you may have, making sure you have legal contracts between you and your business partners (otherwise known as operating agreements) and all the other legal and financial systems are in place.

Setting your business up as its own legal entity:

When making your business as its own legal entity, you can think of your business as a person in some sense. Like a citizen, your business will have its own identification number, although instead of using a social security number, the business will use what’s called a tax ID number.  This number will be used when opening your company bank accounts or applying for credit cards just like when a person uses their social security number.  In addition, the tax ID number will account for your company’s tax payments and to process the tax returns.

There are several different forms of creating a legal entity. The more popular ones forms include C-Corp (Corporation), S-Corp (Corporation with special tax benefits), LLC (Limited Liability Company), and LLP (Limited Liability Partnership). Choosing what type of company you want to file is one of hardest parts in forming a business. Each of these forms of businesses has their own benefits and liabilities. So they must be looked at carefully when deciding what is important in not only the short run goals of your company, but more importantly the long run. When registering Shred Clothing for example, it will be set up as a LLC. The reason for this is it makes our company a limited liability entity and we are able to split the shares evenly among the partners, while protecting ourselves from double taxation. A limited liability company is a somewhat new form of business. It was created for small businesses in order to avoid double taxation on both income and dividends.

However there are also benefits to having a C-Corp. With a C-Corp you are able to divide your company into shares, allowing you to establish percentage of equity. One of the main reasons why you would what to setup your business as a C-Corp is when you are seeking investors. When receiving funds from an investor, the investor(s) is going to want equity in return for their money he/she/they are putting into your company.  The reason why an investor(s) do not want to gain equity in a LLC is because of the way the government taxes them.

When starting a business, companies will usually reinvest profits into the company for the next few years, in order to grow. In an LLC all profits for the year ended are taxed and whoever is a member/manager of the LLC will be directly responsible for paying their percentage of taxes owed.  This would create a problem for an investor with forty percent equity in a company that showed profits, however reinvested those profits and did not pay the investor money that year. With a C-Corp, the investors would only have to pay taxes on money received (dividends), which then protects them from owing money to the government for money they did not receive.

Why and How to set up legal operating agreements between you and your business partners:

After registering your company as a legal entity, it is important to write up operating agreements between you and your business partners. Included in this agreement is how much equity each partner has in the company, initial investment made by each partner, and the duties towards the company of each partner. Other common items to include in an operating agreement are, terms and conditions such as in case of death of one of the partners (what happens with his share of equity), and stating that any opportunity that any of the partners have that are within the scope of that companies area of business must be done through the company and not “on the side”. In forming these operating agreements, depending on how complicated for company or relationship between partners is, each individual partner should have there own attorney in order to make sure all decisions are not bias.

Managing your company’s finances:

Upon completion of your company’s foundation, it is important to set up a system to easily track your company’s expenses, revenues, inventory, services and all financial data. When setting up a financial system for a newly formed company, Quick Books is a very powerful tool. In many businesses Quick Books can virtually replace the job of an accountant. With Quick Books you are able to keep track of all money coming in and out of the company, track inventory, send invoices and easily do taxes. Having an accountant set up Quick Books makes it easier for you and most efficient. Another big advantage to Quick Books, is you are able to link it directly to your company’s bank account, which allows you to easily pay bills and balance your accounts.