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Setting up a Small Business, What You Need to Know


Wednesday, August 1, 2007
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Mtaka Malinyingi arrived in the United States in 1999.  To make ends meet and to help support a large extended family back in his native Tanzania, he worked as an aide in various nursing homes, kitchens and day care centers. He has some modest savings in a local bank.  Now he wants to open a shop to sell uniquely Tanzanian products and tourism packages.  Though an educated man, Malinyingi is overwhelmed by the idea of setting up a business in Minnesota.  He wants to operate within the confines of the law as he has seen enough cases of small business owners getting in trouble.

He will have to take care of the following (list not exhaustive):

Registration: In many states, one does not have to register a business though there are many advantages to doing so.  If you are ready to run your dream shop, it is advisable to seek professional help.  A knowledgeable business and tax attorney should give you what you need within an hour or so.  The couple of hundred dollars you invest in professional fees may save you hundreds of thousands down the road.  This is because a lot of the headaches you face as a small business owner result from poor or inadequate planning.

Incorporation: Incorporation is the process of getting the State to formally recognize your business either as a corporation or a limited liability company.  It is usually a simple process of submitting appropriately worded articles and an application for registration.

Why Incorporate?  There are many reasons why business owners incorporate.  The most important ones are but not limited to:

a. To limit liability: imagine that you sold an item that caused a fire, burning down your customer’s multi-million dollar home on the shores of Lake Minnetonka. If found liable for the loss, you will be required to pay compensation to satisfy the judgment.  As a sole proprietor, all your personal items such as home and automobiles are at risk.  If on the other hand, your business is incorporated; your liability may be limited to only the amount invested in the business.  This shields your personal assets from corporate creditors. 

b. To build credibility:  potential customers wary of walking into con-schemes.  As a new entity, you have not built adequate name recognition and confidence among the public.  If an independent search brings up a record at the Secretary of State’s office, many potential customers feel assured that they are dealing with a legitimate entity.   No one would want to entrust his or her business to what could very well be, a brief-case venture.  The burden is even greater for entities doing business abroad.

Various Entity Choices: Malinyingi will need to determine if his business is going to be a sole proprietorship, a corporation (C-Corp or S-Corp), a Limited Liability Company (LLC) or a partnership.  These are specific legal terms that any new business owner needs to be familiar with.   There are advantages as well as disadvantages of each.  For example, if Malinyingi is still a non-resident alien, he cannot be a shareholder in an S-corporation. Current law restricts ownership interest of S-Corporations to legal residents and US citizens only. Also, there are numerous tax and non-tax factors involved for each.  To understand this, you may seek the guidance of a knowledgeable tax and business attorney or certified public accountant.

Licensing: Malinyingi will need to consult the city or local authority where business will be located to assure compliance with government rules and regulations.  There are differences in requirements, fees and zoning regulations.  Additionally, since Malinyingi’s proposed business includes the sale of air travel and accommodation tickets, there may be industry-specific licensing required by the International Air Transport Association (IATA).

Tax Implications: As new business owner, the entity you choose will have significant and varied tax consequences.  While we will be doing a future column on this subject, suffice it to state now that new business owners need to pay close attention to the tax implications of the proposed business form.  The success or failure of a business enterprise may depend on how well the founders planned for and foresaw tax treatment of income and expenses.  For instance, setting up a C-Corporation may expose the company’s shareholders to double taxation – tax at both the corporate and individual level.  Some entities such as LLCs are non-tax paying but owners are still required to report transactions in an informational return. 

To ensure that he has a handle on the operational side of the business, Malinyingi will have to develop a business plan, the roadmap to wherever your business is destined to go.  As they say, if you do not know where you are going, any bus can get you there.

Mtaka Malinyingi is well advised to seek the services of a competent professional to help him set up his business in accordance with the law.  He could also work with SCORE   or individual consultants or organizations – WomenVenture , yes, they help men too), Small Business Administration, local chambers of commerce such as PABA, community resource groups such as the African Development Center.


The author is a tax and business lawyer and consultant at ABC GROUP, LLC of Minneapolis and H.M. ONGERI & ASSOCIATES, an international law firm with offices in the United States and Africa.  He is the immediate past president of the Pan African Business Alliance (PABA).  He can be reached at
[email protected], or [email protected] or 952-544- 1039.


Disclaimer: The information contained in this article is for informational purposes only.  It does not,  nor is it intended to, constitute legal or tax advice.  Readers who need help with any specific matter are strongly advised to consult a competent professional.

 

 

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About Henry Ongeri

Henry Ongeri is a Kenyan-American lawyer and Managing Partner of H.M. ONGERI & ASSOCIATES, a transatlantic law firm with offices in Africa and the United States. He is a regular commentator on global issues for Mshale.

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