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of Starting a Clothing Company June 3, 2009 Starting Out

Starting a clothing line is similar to starting any other business; there is mor e 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 ar e 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 busines s as a person in some sense. Like a citizen, your business will have its own ide ntification number, although instead of using a social security number, the busi ness will use what s called a tax ID number. This number will be used when openin g your company bank accounts or applying for credit cards just like when a perso n uses their social security number. In addition, the tax ID number will accoun t 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 o nes forms include C-Corp (Corporation), S-Corp (Corporation with special tax ben efits), LLC (Limited Liability Company), and LLP (Limited Liability Partnership) . Choosing what type of company you want to file is one of hardest parts in form ing a business. Each of these forms of businesses has their own benefits and lia bilities. 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 r eason for this is it makes our company a limited liability entity and we are abl e 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 t o divide your company into shares, allowing you to establish percentage of equit y. 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 i nvestor(s) is going to want equity in return for their money he/she/they are put

ting into your company. The reason why an investor(s) do not want to gain equit y in a LLC is because of the way the government taxes them. When starting a business, companies will usually reinvest profits into the compa ny 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 resp onsible 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, howe ver 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 (dividend s), which then protects them from owing money to the government for money they d id not receive. Why and How to set up legal operating agreements between you and your business p artners: After registering your company as a legal entity, it is important to write up op erating agreements between you and your business partners. Included in this agre ement is how much equity each partner has in the company, initial investment mad e by each partner, and the duties towards the company of each partner. Other com mon 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 a nd not on the side . In forming these operating agreements, depending on how compli cated for company or relationship between partners is, each individual partner s hould 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 t o easily track your company s expenses, revenues, inventory, services and all fina ncial 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 rep lace the job of an accountant. With Quick Books you are able to keep track of al l money coming in and out of the company, track inventory, send invoices and eas ily do taxes. Having an accountant set up Quick Books makes it easier for you an d 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 a nd balance your accounts.

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