How to Form A Company In Rhode Island

The business world is competitive, especially in the United States, where over 33 million small companies exist. And in Rhode Island, with only about 1 million population, over 37,000 small businesses are operating (as per 2021 data).

So, if you plan to join this group, you must have a crystal-clear vision of what you want to achieve.

Take the time to research your market, identify competitors, and work out your unique selling point.

Once you have these essentials figured out and the business idea seems worth pursuing, it's time to form your business in Rhode Island.

Start by Selecting a Business Name

When selecting your business name, ensure it's unique and isn't already taken by other registered businesses in the state.

You can use the Rhode Island Corporate Catalog to see if your preferred name is available.

Here are some aspects to keep in mind when selecting your business name -

• Include certain words - If you plan on being an LLC or Corporation, you must include certain terms in your business name, like Limited Liability Company, LLC or Company, Corporation, Incorporated, Limited, or Ltd.
• Exclude certain words - Your Rhode Island business name cannot contain words like "controller" or "police." that could make people confuse it with a government agency,
• Reserve your name - You can reserve your Rhode Island business name for 120 days before filing it.
• Check for a suitable domain name and username - If you plan on doing business online, you need a domain name and username for social media. So, when deciding on the name, find out if a suitable domain name (URL) and username are available.

Choose a Business Structure

There are several business structures, and which one you choose will depend on the kind and scale of your business.

Consider your startup's monetary needs carefully, risk, and likelihood of growth. You can switch to a different structure later, but it can be challenging once you register your business.

If you think about scaling your Rhode Island business, so will your potential risks and liabilities. Hence, it's best to make it a separate legal business entity.

Sole Proprietorship

A sole proprietorship is a business structure that isn't separated from its owner. This means the entirety of your business's profits will go to you.

That's great, but along with the entire profit comes complete financial liability should the business accrue debt or get sued.

Pros & Cons

The Pros

• You'll enjoy complete control and flexibility to run your business.
• You'll receive all business profits.

The Cons

• You'll be liable for all business debts.
• Banks may be reluctant to extend loans due to higher turnover rates and smaller assets.
• Since your business will rely only on you, raising capital on a long-term basis may take more work.

How to Form

1. Choose a business name.
2. File the name with the city or town clerk.
3. Obtain licenses, permits, and zoning clearance.
4. Obtain an Employer Identification Number.

General Partnership

Two or more partners form general partnerships and function similarly to sole proprietorships. This means a partnership is also an unincorporated business; hence partners don't have liability protection.

Pros & Cons

The Pros

• You'll enjoy the benefit of single taxation.
• Partners can use their resources and share any obligation rather than face it alone.
• There's no rigid, obligatory corporate structure.

The Cons

• All the partners are equally responsible for debt and loss.
• Creditors can go after your personal property if your business assets aren't enough to pay off debts.
• You'll be liable for the debts and actions of your partner.
• Lesser capacity to attract investors and raise money.

How to Form

• Choose a name for your business and get registered.
• Create a partnership agreement.
• Secure an EIN.
• Open a partnership bank account.
• Secure the necessary licenses and permits.

Limited Liability Company (LLC)

One or more owners can form LLCs and elect to be taxed as "pass-through" entities—i.e., to be taxed once at members' income levels.

This legal structure offers the combination of liability protection of a corporation with the flexibility of a general partnership or sole proprietorship.

The Pros and Cons

The Pros

• Less paperwork and lower filing costs.
• You can form an LLC by yourself or with several other members.
• You'll be able to opt for pass-through income taxation.
• You and the other members will be free from liability if the company runs into legal issues or debts.

The Cons

• Renewal fees and publication requirements can be pricey, depending on your state.
• Raising capital may be challenging as Rhode Island LLCs cannot issue stocks to raise capital.

How to Form

1. Name Your LLC.
2. Choose a Resident Agent.
3. File Your LLC With the State.
4. Create an LLC Operating Agreement.
5. Get a federal employer identification number - a nine-digit number assigned by the IRS to identify taxpayers who must file various business tax returns.

You can file Articles of Organization to establish LLC with the Rhode Island Secretary of State office by mail or online.

Corporations

A corporation is a separate legal entity distinct from its business ownership.

According to the law, corporations have many of the same rights and responsibilities as people, such as signing contracts, lending and borrowing money, suing or being sued, hiring employees, owning assets, and paying taxes.

Corporations are separate entities, so their financial obligations are not yours to bear. Your personal assets will be protected if the company goes bankrupt or endures a lawsuit.

However, because of this added layer of protection, corporations are subject to corporate taxation, meaning the government taxes business income and the personal income of the corporation's owners and shareholders.

The Pros and Cons

The Pros

• Owners are not personally liable for any legal issues or debt.
• Well-established structure with clearly defined roles and accountabilities.
• You'll be able to sell stock and acquire financial capital.

The Cons

• Establishing a Rhode Island corporation requires a lot of paperwork and is time-consuming and expensive.
• Corporations have to adhere to tons of regulations.
• Possibility of double taxation.

How to Form

1. Name Your Corporation.
2. Choose a Registered Agent.
3. Hold an Organizational Meeting.
4. File Formation Documents.
5. Get an EIN.

You can file your Articles of Incorporation with the Secretary of State office by mail or online.

Open a Business Bank Account

If you choose to become an LLC, maintaining a separate business account is essential to exercise your liability protection at the time of need.

However, no matter which business structure you choose for your company, separating your business expenses is a best practice.

Why?

• Filing taxes will be easier.
• Your small business will seem credible and professional in the eyes of your customers.
• Ensures that the corporate veil doesn't get pierced, and you can enjoy the liability protection of an LLC.
• You'll be ready for future growth.

Buy Insurance

A lot can go wrong when you run a business - like property damage, accidents, and resulting lawsuits.

And if you don't have the right insurance, you may end up paying for the damages and legal claims out of your pocket or lose your critical business assets.

So, don't forget to buy the necessary insurance for your business like -

• General Liability Insurance - Covers some financial losses like no-fault property damage and injuries on the job, like a customer slip-and-fall.
• Workers' Compensation Insurance - Rhode Island law requires all businesses with one or more employees to carry worker's compensation. This type of insurance covers injuries and illnesses employees may suffer on the job.
• Professional Liability Insurance - Covers financial losses resulting from malpractice suits claiming that your business's advice or services caused a customer financial harm.

FAQs

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Please consult a qualified attorney for advice on your specific situation.