There’s a reason why few practical business books have been written, and that’s because it’s a hard balancing keeping the content applicable and useful, without making it too case specific.

However, there are some out there. The following are list of books that fulfill the criteria of being both practical and useful. If you’ve got any favorites of your own, please suggest them in the comments.

1. The Entrepreneur’s Guide to Business Law

As an entrepreneur, you have to be pretty clued up on the legal side of things, to try and prevent making any fatal mistakes. In my opinion, this is one of the most valuable books in an entrepreneur’s arsenal and covers topics such as incorporation, intellectual property, venture capital and contract law.

2. Eric Sink on the Business of Software

This book is geared towards Micro ISVs (very small businesses), but should be useful to anyone starting a startup. Amongst other things, the book covers hiring, finance, marketing and sales.

3. Secrets of Power Negotiating

Ignore the cheesy cover, this book has lots negotiating tactics and counter-negotiating tactics. You really should read this before signing any contracts.

4. Limited Liability Companies for Dummies

It amazes me how few good books there are out there on basic incorporation. This is one of the best and Jennifer Reuting leads you through the entire process.

5. The Art of the Start

To be honest, much of this book is common sense, but there are some useful bits, especially on hiring. Also it’s worth noting that Guy Kawasaki concentrates on VCs (which is not surprising considering he is one).

And a bonus one: Founders at Work

This book describes the trials and tribulations that a lot founders go through. It’s fascinating stuff, and is probably the hardest to put down out of all of these.

If you’ve got any suggestions, post them in the comments.

EIN stands for “Employer Identification Number”, but in reality it’s deals with a lot more than just employees.

It’s basically your companies identification number with the IRS.

Why do I need one?

You’ll need one to do almost anything with your company. Banks will require one, as will Merchant/Gateway accounts.

How to get an EIN if I’m a US Citizen

Although your incorporation company might offer to get you one (for a fee), you don’t need to go down that route.
Instead, you can apply free online at the IRS website.

How to get an EIN if I’m not a US Citizen

This is a bit more tricky as the online service only accepts US citizens.

You’ll need an ITIN (Individual Taxpayer Identification Number) which is a tax processing number for people without Social Security numbers. You should be able to get one in your countries US Embassy (check their website first). Take two forms of photo id (passport & driving license) and your incorporation documents. Once you’ve got an ITIN you can apply online for your EIN.

If you’re in a hurry, you can pay your incorporation company to get one for you. However, you’ll need to apply for an ITIN at some point, as you’ll need it when you file your personal tax return.

I’ve “open sourced” our Operating Agreement (links at the end of the article).

The Operating Agreement is a legally binding contract between the members of the LLC. Although many states do not require LLCs to have an Operating Agreement, you should see it as a legal requirement (even if there’s only one member).

An Operating Agreement will give you credibility in court, and it’ll be harder to pierce the corporate veil (i.e. sue you personally) if you’ve got one in place. So essentially you need a Operating Agreement to protect your Limited Liability. It’s also for this reason that if you’re a single member LLC, it’s even more imperative that have a Operating Agreement as it may be that much harder to protect your Limited Liability.

Practically, an Operating Agreement is designed to get all the Members on the same page, and try to prevent disagreements later on down the line. If there are any problems, you and the courts will look to the Operating Agreement for guidance.

Default Rules

Most of the states passed a body of law which aims to codify a common body of laws. These are called the “default rules”.

However, your operating agreement can override the default rules, and it’s a good idea too – even if it’s just for the sake of clarification. Additionally, some of the default rules are definitely not what you want – like equal dividend allocation regardless of ownership in the company.

General Provisions

All Operating Agreements should contain provision that deal with the following topics:

• Governing Law
• Non-compete
• Limited Liability for Members
• Voting power
• Buy-sell provisions
• Dissolution

Membership Interests

A Membership interest is a lot like a share in a normal company – it’s basically a percentage of ownership in the company. Dividends are usually linked to your Membership interest (but again, this can be overridden if necessary).

Depending on your Operating Agreement, certain Membership shares may not carry a voting right – a bit like the non-voting shares issued by some companies. LLCs are flexible, you can give members as few, or as many, responsibilities as you want.

Manager Managed

Manager Managed LLCs give you a bit more flexibility. A lot of businesses have silent partners who aren’t involved in the running of things, and it’s usually preferable to prevent them meddling with your daily operations.

This means you have have two types of membership rights, voting an non-voting. Then you specify that the voting members will have management rights, and the non-voting members no managerial rights.

Appendixes

They should also contain a appendix of Members, their membership share, and the type of contribution they made when joining the company, and its value.

Also, if the company is Manager Managed, you’ll need an appendix of managers.

New Members

It’s important that all new <embers have to sign the agreement. If a Members’ shares are seized by a creditor, then you’ll want to enforce the same rules over the creditor, who’s interests won’t necessarily be aligned with yours.

You’ll also need to decide whether new Members need to be approved by a majority or unanimous vote by the current voting Members.

Transfer of Membership Interest

Your Operating Agreement should contain provisions dealing with how Membership interests get transferred. Most LLCs don’t allow Membership interests to get transferred, by rather assigned. For example, a Member could sell the interest to another party, who would subsequently receive future dividends, but have no voting rights. It would require another vote by the Members to actually make the new party a full voting member. This is another advantage of Manager Managed LLCs and is called ‘charging order protection’ – google it for more information.

Other Provisions

There are a lot of other provisions I haven’t mentioned here – for sake of terseness. These include dissolution, dispute resolution, voting & quorums, management & duties and allocations of profits/losses.

I really recommend Jennifer Reuting’s book, which is much more comprehensive. There is also a good article on findlaw.com about Operating Agreements.

Here is an Operating Agreement you can use as a template:

• Operating Agreement
• Appendix A
• Appendix B

The next post will be on how to get an IRS EIN.

Which state?

First, you need to decide where to incorporate. Each state has different laws – and some are more suitable for incorporation than others.

Delaware is a popular choice because its a favorable and business friendly environment. Some 571,000 businesses have been setup there, including 58% of the Fortune 500.

Delaware imposes no state income tax on a business that does not operate within the state. That usually means if you don’t have a physical presence within the state, you’re exempt from that tax and will only have to pay the LLC franchise tax.

Delaware is also famous for it’s established body of laws and Chancery Court, which are unique to the state.

Anyone can set up a business in Delaware, without ever visiting the state. In addition one person can hold all the positions and be the sole owner of the business – perfect for Micro ISVs.

There are other popular states for incorporation, such as Nevada. It’s worth doing a bit of research to find out which one’s best for you.

Choosing a name

You’ll also need to decide upon a company name. This will be need to be unique inside the state – most incorporation services will do a free name check. This is also the time to think about a domain name too.

DIY or incorporation service?

You can file the incorporation forms yourself, paying a minimal filing fee. However I recommend getting a firm to do it for you, especially if it’s your first time, or you’re outside the US. There’s a good blog post here on the tradeoffs to both approaches.

Most firms will also offer to be your registered agent – though only if you incorporate through them. A registered agent is someone who is in charge of receiving court documents and forwarding them to you. Delaware law requires you to have one, but it’ll only set you back $50 a year.

I really recommend Harvard Business Services Inc for incorporation. Their cost was reasonable, and customer service was great.

Harvard’s basic international package is currently $450. Personally I don’t think it’s worth paying for the standard or premium packages – you can purchase a ‘corporate kit’ separately for much less.

When you incorporate with them, you’ll need the names of the Managing Members. These names aren’t registered with the Delaware state, but are for the documents showing the incorporating office has signed over control to you. Basically the system is designed to protect your anonymity. If  you assign yourself as a Managing Member of the LLC, you can assign others later without having to inform the state.

The other cost you’ll have is the annual Delaware LLC franchise tax. This is a flat fee of $250, due on June 1st. If your incorporating towards the end of the year, it might be worth waiting till January so you don’t need to pay that year’s franchise tax.

Next steps

Once you’ve incorporated, the next step is for all the members to sign the Operating Agreement – I’ll tackle this in the next post.

1. Choosing a Company Type
2. Incorporating a LLC
3. Obtaining an LLC EIN
4. Obtaining an LLC Bank Account
5. Obtaining a Merchant Account

When you go through the company incorporation process, you need to decide what type of company you need.

All have their pros and cons, and what type is best for you really depends on your short to medium term objectives.

I’ve outlined the types below, and the general scenarios in which they’d be applicable.

LLC

Has been called the Ruby on Rails of company types – light and flexible. Youtube, for example, is a LLC.

The main benefits of an LLC are:

• Pass through taxation
• Less formalities
• Lower state taxes (yearly franchise tax)

The pass through taxation means you only pay income tax, and you don’t get double taxation (as in the case of a C Corp).

LLCs are run by their managing Members, and unlike C/S Corps there aren’t shares, but rather membership interests.

The caveat to an LLC is that a VC is less likely to invest – since when do they risk getting an income tax called UBTI (unrelated business tax income) which is frowned upon.

C Corp

Most of the big companies out there are C Corps. If they’re publicly traded then they definitely are.

C Corps are subject to corporation tax, and therefore suffer from double taxation (once at the corporate level, and once on a personal level).

There a lot of formalities regarding the incorporation and running of C Corps, such as bylaws and shareholder meetings – some of which you can avoid with LLCs.

S Corp

A corporation that’s elected Subchapter S status in the eyes of the IRS. In plain English that means you have pass-through taxation, like an LLC, but the following restrictions apply:

• No foreign shareholders
• Shareholders are limited to 100
• Shareholders can’t be companies

S Corps can provide tax advantages over LLCs, but you need to weight that up against the extra administrative costs.

It’s unlikely that you’ll be able to get investment as an S Corp (certainly not VC investment) – however switching from an S Corp to a C Corp is a matter of checking a box in your tax forms – no lawyers needed. Moving from an LLC to a C Corp, on the other hand, is a much more tricky process.

Now, which one should you choose? Obviously that depends on your circumstances and if/when you’re getting investment.

However, for non-residents I generally would suggest a LLC. It’s a lightweight structure, with pass through taxation, that doesn’t have any of the S Corp restrictions. It’ll get out of your way, meaning you can spend more time building your startup, and less time dealing with administration.

In the next post I’ll explain how to actually get incorporated, and the signing of the Articles of Organization.

Additionally, I’ll be ‘open sourcing’ our Articles or Organization - making them freely available to everyone.