Typically, the newspaper which you are told to post in by the county clerk will know what to do and, upon receiving your payment, will send you a notarized & signed Affidavit that meets all state requirements.

Once you get both of these, I suggest you visit this page: http://www.dos.state.ny.us/corp/newlegislation2006.html. It has all the details about the process and provides a PDF version of the Certificate of Publication. You complete this form and send it to DoS, Division of Corporations, along with the $50 filing fee and the two Affidavits of Publication.

That’s it! In the next post, I will discuss the Operating Agreement. Ours will be drafted this weekend. In other news, my partner has deposited his $7.5K, so we now have an easy 50/50 ownership structure, with a total capital base of $15K. I think that should be enough to start. The plan is to brainstorm, research, and map out the site for the next month or two, and begin hiring employees for the summer.

Then, I mailed out payments to the two newspapers in which I took ads out in. Once they receive the payment, because my 6-week ad run ended already, they will send me Affidavits of Publication, which I then have to send to the Department of State. More on that once I receive them.

I have also finally filled out and sent in that Partnership Questionnaire form I’ve received from IRS back in December. I know, it’s only been four months since then, but it didn’t seem to have any penalties for lateness, so I don’t think it’d be a big deal.

Lastly, I have requested forms for a co-signer, so that my partner could have access to the account and could deposit his initial capital into it as well. I faxed him the forms, he signed them and faxed them back to our banker. I am going back to the bank on Wednesday to finalize the paperwork and have everything completely. Hopefully, his token and access card should arrive within a week and he will be able to transfer his share of the money then.

I don’t know how I managed to do that while putting in 12 hours at my day job and going to the gym, but I’m just trying to tie up some lose ends this week. If this is all figured out by Sunday, I will hopefully have time to work on the Operating Agreement next week. That’s the next step.

Anyways, I faxed my certified Articles of Organization over to Citibank for processing. They also requested that I fax/bring them a copy of a utility/phone bill that proves that I live where I say I do. I didn’t have any, so I faxed them some documents from IRS that have my address and name on them. Citi also had someone call my home phone to verify that I live there.

While all of this was going on, my business banker emailed me my bank account and made sure that I received my online account set-up instructions and my new ATM card.

The online instructions came in two letters. One contained my temporary password and instructions. The other contained my CitiBusiness Online Security Token. I called the number in the first letter, told them my temporary password and randomly-generated token number and they give me a User ID and a Business Code. I then used those to log into a new Citi site that asked for my temporary password, a new token number, and a bunch of other security questions. It then allowed me to generate my own password, which I used, along with a new token, to perform transactions online. It feels very James Bond-ish your first time.

Anyways, the bad thing is that my business banker did not link up my personal checking account and my business checking account (I have both with Citi), so I had to go to an ATM and transfer my funds that way. Apparently, if I transfer funds between two unlinked accounts online, it is considered a wire and costs $12.50. Otherwise, it is free in an ATM.

1. Photo ID (either state license or passport)
2. Your tax ID (EIN)
3. LLC Filing Receipt from your state
4. LLC Operating Agreement
5. If this is an Internet start-up, a printout of your website

Now, a few key points. If you “misplaced” your LLC Filing Receipt (mine, for example, was), you can submit a certified copy of your Articles of Organization. You can get those by going to the state’s LLC formation website, filing out a form and checking off the proper document. Information could be found at: http://www.dos.state.ny.us/corp/llcguide.html. In New York, you have to actually make a written request for this and mail it in to the Department of State, Division of Corporations, 41 State Street, Albany, NY 12231. I have faxed mine in and am waiting for my copy so I could fax it to the Citibank banker and complete the account.

Also, all of your company members do not need to be present at the time of account opening. You can open the account with just one person and then have the rest sign signature forms and provide copies of their identification at their own convenience.

Lastly, sweet talk goes a long way. The business account manager needs to justify each account opening to his auditors. I guess they’re afraud of money-laundering or illegal-purposes accounts being opened. That means that the banker will probably question you on what kind of business you are opening, how you are planning to make money, where you are planning to get resources/employees from, etc. I had a nice chat with my banker, who happened to be a big fan of social networks and all things Silicon Valley-related and he ended up waiving the operating agreement requirement, considering I haven’t yet drafted one. He said to fax it over once I have it, but it wasn’t going to hold up my account creation. He also asked for a print-out of the site, but I told him that all I have so far is this blog to spread the word about the company, but the actual site will get created by coders who will get paid out of the company’s bank account. So, first, I needed the account, then I could get the site. He allowed this to pass as well.

In the end, you can really get away with just your ID, tax ID, and filing receipt. But the other docs will be asked for. You will also have to sign a bunch of forms concerning business account acitivities, but that’s all boiler-plate stuff. Lastly, it helps to create a business account in the bank where you already have your personal account because they will a) connect the two in their computer systems and pull in all the info automatically; b) deem you more credible, because you have an established history with their bank; and c) possibly waive the annual checking account fee that is common for small businesses, because you will be considered as a more valued customer.  At least, that’s what Citibank offered me. I don’t know how this process works at other banks, but I would imagine it’s similar.

1: This letter was from IRS and it contained forms 1040-ES/V and instructions. Basically, they provide information on how to file estimated tax payments and attach pre-labeled forms and envelopes to allow you to do it. From their instructions: “Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, etc). The estimated tax payment vouchers are preprinted with your name, address, and social security number (SSN). In most cases, you must make estimated tax payments if you expect to owe at least $1,000 in tax…”

I expect to invest a bunch of money into my business and not make enough of a return on it to re-coup my losses by year-end, so I don’t think I need to be worried about estimated tax payments on my self-employment earnings just yet. But if you think your website will be a cash cow in its first year, then this is probably something you should look into.

2: This letter was labeled EFTPS (Electronic Federal Tax Payment System). According to the letter: “When you were assigned your EIN, you were enrolled in EFTPS to make your Federal Tax Deposits online or by phone. To make your deposits, you will instruct EFTPS to transfer funds from your bank account to Treasury. This brochure will walk you through your activation.”

Basically, you’re provided a pin and your call up their automated system, put in the pin, your EIN, and your bank account information, and it will activate the service for you. I will not be reporting any income/loss/tax for previous year, since I just registered the company in mid-December and had no activity by year end, but this will help me when I do my next tax return.

3: This last letter was from the Department of Treasury. I guess it was automatically dispatched after I submitted form SS-4 and received my EIN. IRS generates a Tax ID as soon as the form is submitted online, but this letter is the official receipt. Anyways, one of the things stated in the letter was:

Based on the information from you, you must file the following form(s) by the dates shown:

• Form 941 - 10/31/2007
• Form 1065 - 04/15/2008
• Form940 - 01/31/2008

If you believe your employment taxes for 2007 will be less than $1,000, please file Form 944, Employer’s Annual Federal Tax Return. Otherwise, you are required to file Form 941, Employer’s Quarterly Federal Tax Return.

I guess once I get employees this will become even more complicated and confusing. I don’t even know what the other forms are, but I’m guessing they are IRS-related. I don’t have to fill them out for at least another half a year, which, I guess, gives me some time to read up on them.

On Monday, the 29th, I started filling out the LLC Filing Fee Payment Form (since it was due by Jan monthend). Since I’ve done no business through the LLC in 2006 (it was only formed Dec 7th and I had no time to work on it at all that month), the completion of this form was pretty simple. Since I’m claiming no income or loss from New York sources for the year, I am exempt from the $500 filing fee and have to only fill out my company information and sign the form. However, this is a little tricky, because it asks for your tax ID number, so you have to apply for EIN (Employer ID Number) first.

For that, you go here and submit it online. You get your tax ID as soon as you hit submit, provided you fill it out properly. This form is pretty straight forward as well. It does ask you some questions that require a bit of though (nature of your business, how many employees you are expecting to hire in the next 12 months, type of entity you are applying for - partnership, for most LLCs). I would highly recommend that you read through the instructions for both SS-4 and the state LLC filing fee form to make sure you answer everything correction. They are relatively short and easy to get through. The one tricky part on SS-4 is on the bottom, where it asks for name and title. Don’t try to make up a fancy title here (CEO, Founder, Chief Magistrate, etc) - it’s supposed to be “your name, LLC member”.

Anyway, so once I submitted the SS-4 and got my Tax ID, I filled out the rest of the State LLC form and mailed it in. Immediate needs taken care of, I went to a local Citibank branch (simply because I already have  an account with them) and asked for details on opening up a business account. They gave me around 10 pages of forms to fill out that include some pretty detailed questions, such as the amount of deposits/withdrawals I will be doing, number of partners, projected revenue, etc. I’m planning to sit down this weekend and carefully go through the docs - will post an update on what they ask once I get more familiar with it. Besides the forms, I need to provide an ID (license or passport is fine) for every member  (you can submit photocopies if you can’t get all the members together to come down) and have every member fill out a one page membership/signature form. These have to be originals, so you can’t have people just fax them to you. I’m not seeing my friend till next week, so I’ll probably ask him to mail it to me, might be faster.

In other news, I went to a Google open-house / recruiting event last night. It was the most fun recruiting event I’ve been to, at least compared to stuffy Wall St recruiting. Everyone was really friendly, laid-back, and in love with Google and everything Internet. I found out a lot about the company (and yes, they are planning to take over the world) and got a chance to meet some competition. There was a number of founders and enterpreneurs among the atendees. I met the founder of www.ModelsHotel.com, for instance. Another social network. However, he saw the opportunity much earlier than me, as he started in Feb 2006 and went live in September. In the past 4 months, he’s expanded to six people and has revenues of about $6K/month, from ads. Not exactly the next Microsoft, but it goes to show that the concept does bring in money, at least. However, he did start with $150K in initial capital that he got from an angel investor. So compared to my 20K startup capital goal, that seems like a lot of cash. But then again, I’m only hiring college kids, so who knows…

1. C-Corp: If you want to eventually go public, this is what you want to do. Every publicly traded company is a C-Corp; no exceptions. Moreover, almost all of the companies that receive venture capital (I am talking serious, multi-round venture capital, not just seed/angel investments), are C-Corps. That is because it has a rigid compliance structure that VCs and investors appreciate, as it requires mandatory disclosures, etc. Ths is a very formal company structures and it requires a number of procedures and documents (such as Articles of Incorporation, Current By-Laws, mandatory annual meetings, mandatory directors/officers/shareholders, mandatory minutes of all meetings and records of all shareholders, etc). As you can see, it’s not simple. However, on the bright side, C-Corp has no limitations on the class of stock issued (useful for multi-round financing, where various stock classes have various voting/management rights), and has no limitations on who holds the stock. As far as the law and the IRS are concerned, it is a separate legal entity, akin to creating a new person, and all the members are awarded limited liability from the corporation’s debts. Same “piercing of the corporate veil” idea applies to C-Corps, as to the LLCs though. Failure to maintain a company truly separate in the eyes of the court will cause them to go after your personal assets without a second thought.A lot of sources will say that an C-Corp is bad because it has double taxation, at the company level and at an individual level. That is only on dividends or on the assets distrubuted upon dissolution. Otherwise, C-Corps allow for “income-splitting”, which may actually prove to be better than straight-through taxation. That means, when a company is bringing in more profits than the members need to live on, they can split the money into salary and re-invested profits. Lets say your company makes $200K, and you have 50% ownership share of it. If it was a partnership, it would be taxed at a personal tax rate of 34% for the entire 100K. Which is 34K. However, if you have a corporation, you can pay yourself a salary of, say, 50K, which would get taxed at 34%, and have the other 50K remain in the business, reinvested. Then it would be taxed at the corporation level (15% for the first 50K, 24% for 50-75K, roughly 34% afterwards). You would save 34K - (34% * 50K) - (15% * 50K) = 10K in taxes over a partnership. However, if you have no profits yet, and are not planning to go public, setting up a corporation is both cumbersome, expensive, and time-consuming. However, most dot-coms are still corporations, simply because that’s what most VCs require.
2. S-Corp: please note that there is no such legal entity as an S-Corp, it is simply a tax election which allows pass-through taxation, instead of regular corporate taxation. In order to create an S-Corp, members have to form a C-Corp, and go through ALL the requirements of forming one, and then file an IRS Form 2553, electing to tax their corporation as an S-Corp. This must be done within the first 2 months and 15 days of incorporation. The main advantage of an S-Corp is its ability to pass-through its profits into the members’ income tax returns. In other words, there is no independent taxation of the corporation as a separate entity (with its own tax return); all of the profits and losses of the company are passed straigth through onto the individials’ returns. This could be used to avoid double taxation and simply accounting procedures. On the other hand, an S-Corp is limited to 75 shareholders (who must be US citizens or legal residents) and can only issue one share of stock. As a result of these restrictions, an S-Corp is not favored by VCs, as it cannot go public.
3. LLCs: Limited Liability Companys are not incorporated and cannot go public. They can issue multiple shares of stock, but mostly do not have a large number of members (less than 25 typically, including investors). They can have as little as one member and an indefinite lifespan. There are three types of LLCs: proprietorship, partnership and corporation. Let me go into a little more detail:
   • Proprietorship: as a sole business owner, it is not prodent to operate as a sole proprietor, because you have full liability. Forming a single-member LLC is automatically taxed as a proprietorship under IRS rules. It can be claimed as a disregarded entity for tax purposes, which means, as far as IRS is concerned, it is not a separate entity. That allows the single member of an LLC to file regular 1040 tax form (with Schedule C: Profit or Loss from Business), while gaining limited liability protection. A single-member LLC can also elect to be taxed as a corporation. For that, it has to file IRS Form 8832: Entity Clasification Election and check off a “corporation” option. In addition, IRS Form 1120S: Tax Return for an S Corporation, must be filed with the regular 1040 tax form. Note: this is a single-member LLC choosing to be taxed as an S-Corp for tax purposes. This is NOT an actual, legal corporation-type entity. As far as laws and statues are concerned, it’s an LLC. It has simply elected to be taxed as a corporation from tax standpoint. This is not an S-Corporation formed by a convertion from an C-Corp (as discussed earlier), so there are no incorporation requirements to be met.

1. Follow the instructions in the previous post and check if your business name is taken in the state database, then fill out the Articles of Organization, and fax/mail it to the Dept of State with a $200 fee.
2. Within two weeks, you will receive an LLC/LLP Request for Information form from the NYS Dept of Taxation and Finance. It will ask you how you want the LLC to be treated (sole proprietorship/corporation if you’re alone or partnership/corporation if you have two or more members), along with your Tax ID, your LLC’s NAICS business code, and addresses/social security numbers of your other LLC members. Make sure to think ahead before filing for an LLC, because you have 15 days to complete and return this form. I go into details on different LLC classifications and how to get your EIN number in other posts.
3. As a newly formed LLC, you now have 90 days to create your Operating Agreement (OA). This agreement outlines all the rules that members follow throughout the life of the partnership; it’s similar to Corporate By-Laws of a corporation and is a compilation of procedures and guidelines for the entire operation of an LLC. The OA discusses such things as initial capital contribution, distribution of shares, voting method, meetings, sale of property/shares, etc. I will go into more detail on this in a separate post, as there are a number of clauses that simply must be included. I will only note that this is an internal document and is not submitted anywhere. However, it must be signed by all members and will be used by the IRS if there is a judgment against you. While some states allow an oral agreement, New York States required a written one.
4. Since you should now have your LLC filing receipt from the state, your Tax ID, and your Operating Agreement, you can now go to your favorite bank and ask them for the required forms to open up a company bank account. The forms are involved, so be prepared to think this through, as they really drill you. I will go into account opening procedure in a separate post.
5. Once you open the bank account, deposit the initial capital into it, for the amounts outlined in the Operating Agreement. Remember, you need to submit adequate initial capital so the court, in an event of bankruptcy/default/lawsuit, will not pierce your corporate veil. What that means is that if you don’t put in adequate initial capital (let’s say you and other members put in a total of 1K), and then you take out a number of loans and hire a bunch of workers to do work and declare bankruptcy on the company, you cannot hope that the fact that it’s a Limited Liability Company will protect you personally. The court will find that your initial capital was not enough to complete the work and will pierce the “limited liability” portion and go straight for your assets. Do not end up in this situation!
6. Besides the Operating Agreement, you are also required by the New York State to post notices of a newly formed LLC in two newspapers, as designated by the county clerk. You have 120 days to do this and you have to run these “public notices” for six consecutive weeks. There are tons of websites out there that will do this for you for around $300 (not including actual filing fees). Do not do this. I thought of doing this myself, until I realized that the actual filing fees are so high that wasting another $300 to have someone else do this for you is just ludicrous. I will outline how this is done; it’s not that difficult.
   • Call the NYS county clerk at 646-386-5955, and ask for Estor Mendel (between 9AM and 2:30PM EST).
   • Estor will ask you to fax over your LLC filing receipt that you’ve received from the state when your LLC was registered. I believe the fax number is 212-374-5790, but she will tell you the number. One of your assigned newspapers will be the New York Law Journal (it’s mandatory for all LLCs) and the other you will have to call Ester back in 3-4 days for, and she will tell you then.
   • The New York Law Journal has a website for LLC formation here: www.publicnotices.law.com/NYLawyer/. You go there, fill out your LLC information, and submit it to them. It takes them up to a week to respond. They will tell you that the flat fee for a notice is $723, but that’s not true. That’s only if you fit yours within 15 lines, and their lines are so small that it’ll likely go over. It’ll be different for everyone, but mine ran me $1,200. Yes, $1,200 for one notice. Anyway, they will email or fax you a scanned proof of your ad and you have to consent to it being placed in the paper.
   • Your second newspaper will be designated by the county clerk. Mine was the WestSider publication, which I’ve never heard of before. After some digging online, I’ve finally got in contact with them and was able to place my ad (same wording) for about $600.
   • Once you finish your 6 week run and pay for the postings, both newspapers will send you Affidavits of Publication. You then file the affidavits with the state (each costs $25) and, thus, complete your legal requirements for LLC formation. Detailed state instructions on Affidavit filing could be found at: www.dos.state.ny.us/corp/affidavitsnewspub.html. As these are rather large expenses, I highly recommend that you pay for publication fees from your newly formed corporate bank account, to keep things seperate and to be able to write them off as business expenses later on.
7. As for as State Tax Department is concerned, you must file form IT-204-LL within 30 days after the last day of the tax year, or before January 30th of calendar year filings. Nothing that I’ve read has mentioned this, and so, receiving this form on January 26th, when my company was formed two weeks before the end of the year, with a deadline of January 30th, came both as a shock and a surprise. This form is an LLC State filing fee. The fee is $100/year/LLC member (minimum is $500, maximum is $25,000), or, for a single-member LLC that is reported as a disregarded entity (more on this in a separate post), the fee is $100/year. I discuss the details of this form in a separate post.
8. You will also have to file a number of tax forms, for both state and the IRS, as the April 15th deadline approaches. I will discuss these in a separate post, as well.

OK, these are the basics, and if you follow the steps, you should be officially up and running. Please note that LLC formation is not as easy or as cheap as most books and websites will have you believe. A ton of sources will tell you that LLCs are really easy/quick to start and are so much better than S corporations, etc. While that may be true in some cases, forming a company - any company - is neither cheap nor easy. In my experience, it costs about $2.5K just to register an LLC in New York State, not to mention, a significant amount of time, planning, and thought.

• Please check off the tax method of your entity: individual, partnership, or a corporation
• Please enter in your tax ID; if you do not have one, but have applied for one, please write “Applied For”
• Please provide names, addresses, and social security numbers of all members of your LLC

And so on. Needless to say, I was quite preplexed by all this, since I haven’t given this one iota of thought yet. The worst part was written in bold letters on the bottom of the letter:

Please fill out this questionnaire and return it to sender withing 15 days of your receipt.

Uh…right. By the time I got back from vacation, it was already past the deadline, and I had no clue how to answer the questions, anyhow. I realized that I was inadequately prepared for this and decided to stock up on some books. After a search on business formation on Amazon, I ordered the following:

1. Nolo’s Quick LLC: All You Need To Know About Limited Liability Companies (3rd edition)
2. Profits, Taxes, & LLCs [Paperback] by Crouch, Holmes F.
3. Small Business Taxes Made Easy: How to Increase Your Deductions, Reduce What You Owe, and Boost Your Profits
4. High Tech Start Up, Revised and Updated: The Complete Handbook For Creating a Tech Start-Up
5. Engineering Your Start-Up: A Guide for the High-Tech Entrepreneur (2nd Edition)

I recommend all of them, but the LLC formation books are more practical than the tech start-up books (as well as more up-to-date), so I would advice starting with them first. I have honestly not yet read the Small Business Taxes book, but it’s gotten really good reviews and I’m looking forward to it. Nolo’s LLC provide an outline of the LLC structure and compares it against others. It’s both informative and easy to read and I recommend it.

Profits, Taxes, & LLC uses California laws and forms as examples throughout the book, so a California resident would get a lot more out of it than most other people. Regardless, it’s pretty helpful in terms of legal ramifications of an LLC and various IRS tax quirks. It drills down deeper into actual state statutes and IRS language for partnerships and LLCs than Nolo’s book does, although it’s a bit more verbose. Still, I would read them both in sucession.

High Tech Start-up is somewhat dated (last updated in 2000, pre dot-com crash), so a lot of its findings come down to the fact that during the Internet boom, there may be periods of extended share price increases and quick paths to an IPO. That’s obvious. However, it does manage to have enough foresight to look at aggregate research and not just the dot-com era. It examines and interviews a number of start-ups from about 1970 to 2000. I found it to be more useful to a group of experienced engineers who have a fundamental tech idea that they are trying to get VC funding for and, ultimately, go public with. I guess, once it comes down to it, that IS the definition of a start-up, but that didn’t help me. As a dot-com founder, I don’t care much about hiring VP of Operations or can extract much benefit from knowning that I should have “the most experienced management team in place”, because I don’t know any experienced managers. I’m just a college graduate trying to start a website. So a lot of this book went right over my head, but I could see how a lot of its lessons are both timeless and invaluable to people it’s more closely aligned with.

Engineering Your Start-Up seemed like an interesting read, although it was meant for engineers. It talked about what it’s like to start your own company, the realistic demands and stress of going solo, etc. It’s meant at first-time enterpreneurs and tries to give them a balanced view of pros and cons of starting up your own firm. It’s a little more up-to-date, as well, since it was written in 2003 and is able to analyze the dot-com era retrospectively. However, I can’t speak about the entire book, as it was in the same stolen back as my LLC filing receipt and I never got past the first 100 pages.

One other book that deserves a mention is the Startup Company Bible for Entrepreneurs by Michael Stathis. I haven’t bought it myself, because it’s pretty expensive (even on Amazon - $66), but it’s got the best reviews of all start-up books I’ve seen and from the excerpts I’ve read, looks to be a definitive guide and reference on the subject. If I ever get to the first round of financing, I will definitely be buying this.