Once you have a business idea, creating a business can seem difficult from a legal standpoint.
However, structuring your business with careful thought and guidance will pay off over time, as you can protect your personal assets, reduce your tax burden, and add legitimacy to your business. Each state has different requirements for business formation and annual filings, but the same general steps apply:
- Choose a business name. Go to the Secretary of State website for the state you plan to incorporate and run a simple business search to make sure the name isn’t already in use. In many states this search is free, but in some states there may be a small fee.
- Decide Which business to use. At this stage, consider consulting a business attorney or accountant to discuss the tax implications of each type of entity and receive personalized advice. You choose a business that maximizes the protection of your personal assets while minimizing your tax burden. Most closely held businesses must be formed as a Limited Liability Company (“LLC”) or Subchapter S Corporation (“S Corp”), although some may be formed as a C Corporation (“C Corp”). While you can operate a business personally as a sole proprietor, this automatic status comes from never forming a business, and you may be personally liable for the business’s debts and obligations. Some general differences and considerations for LLCs, S Corps, and C Corps:
- Register your business with the Secretary of State. To create an LLC, you enter “Articles of Incorporation.” To create an S corporation or C corporation, you enter “articles of incorporation.” The state of incorporation can be the place where the business is headquartered, or it can be another state as long as the business has a registered agent there. For most closely held businesses, the easiest and most logical place to register is in your own state.
- Many states allow you to create an online account to submit your file and create new documents later if needed. Once the State Department submits your file, the filing will list the date your body was officially created.
- Draft an operating agreement or bylaws. An S Corp or C Corp has “Bylaws” while an LLC has an “Operating Agreement”. Both documents govern the internal affairs of the business, such as how often meetings are held and how records are kept. You will keep this document in your company’s records, but you do not need to file it with the Secretary of State. Note that if your new business has multiple owners, you may want to include provisions in the operating agreement or shareholders’ agreement regarding corporate governance, transfer rights, and other matters.
- Apply for an Employer Identification Number (EIN) online with the IRS. An EIN is the business equivalent of a Social Security number, and you use it to file your business taxes and open a business bank account. If you complete the above steps, a relatively quick and painless EIN file can be filed online through the IRS website, and at the end you will receive an EIN immediately.
- For S Corp only: File Form 2553 with the IRS. To elect S corporation tax status, you need to file this form no later than two months, and the S corporation election takes effect 15 days after the start of the tax year, or any time during the tax year before the tax year. The S Corp election will apply.
- Open a commercial bank account. To protect your limited personal liability, you must separate business funds from your personal funds. If your bank wants to set up the account in person, call ahead to make sure you bring any documents the bank requires in addition to the EIN.
- Plan for your business finances and taxes. As with personal income taxes, businesses must pay taxes at both the state and federal levels. Note that even pass-through entities such as LLCs and S corps pay certain taxes, such as sales tax and employment tax, even if the entity itself does not pay income tax. At this point, you may want to schedule a meeting with an accountant. Some practical tips for keeping track of finances and taxes include:
- Make a list of all the financial-related tasks that need to be done each month, such as running payroll, which includes paying yourself.
- Create month-to-month deadlines that occur quarterly or annually, such as paying quarterly taxes and filing annual reports with the State Department where your business is incorporated.
- Discuss with an accountant what business expenses are tax deductible, so you can clearly document deductible expenses long before tax season comes around.
- Invest in payroll and/or accounting software. Most of these platforms process payroll with a few clicks of the mouse, provide payroll and tax reports that you can easily submit to an accountant, and even charge you quarterly taxes, freeing you up to focus on growing your business.
- Apply for necessary permits, licenses or certifications specific to your industry. Businesses in certain industries must be licensed or certified to do business in that particular industry. For example, restaurants may be required to obtain a business license, occupancy license, food service license, sign license, liquor license, and more.
- Find and obtain the appropriate insurance coverage for your business and industry as needed. You can work with a trusted insurance broker to develop a customized plan that works for your business.
Once these steps are completed, your business will be off to a great start!
