Once you have a business idea, creating a business entity can seem legally daunting.
However, setting up your business with careful consideration and guidance will pay off over time, as you can structure your business to protect your personal assets, reduce your tax burden and add legitimacy to your business. Each state has different requirements for business formations and annual registrations, but the same general steps apply:
- Choose a business name. Make sure the name isn’t already in use by going to the Secretary of State’s website for the state where you plan to incorporate and performing a simple business search. In many states, this search is free, but in some states, there may be a small fee.
- place which business entity to use. At this stage, consider consulting a business attorney or accountant to discuss the tax implications of each type of entity and get personalized advice. You will ideally choose the business entity that maximizes the protection of your personal assets while minimizing your tax burden. Most closely held businesses must be formed as either a limited liability company (“LLC”) or a subchapter S Corporation (“S Corp”), although some can also be formed as a C Corporation (“C Corp”). . While you can operate a business individually as a sole proprietor, which is the automatic status that comes from not formally setting up a business entity at all, you can be held personally liable for the business’s debts and obligations. Some general differences and considerations for LLCs, S Corps, and C Corps are:
- Register your business with the Secretary of State. To form an LLC, you will file Articles of Organization. To form an S Corp or C Corp, you will file Articles of Incorporation. The state of incorporation can be the state where the business has its headquarters, or it can be another state as long as the business maintains a registered agent there. For most related businesses, the simplest and most logical place to register is in your home state.
- Many states allow you to create an online account to file your case and create new cases later if needed. Once the Secretary of State files your file, the date your entity was officially created will be noted on the file.
- Prepare an Operating Agreement or Bylaws. An LLC has an “Operating Agreement,” while an S Corp or C Corp has “Bylaws.” Both documents regulate internal business matters, such as how often meetings will take place and how records will be kept. You will keep this document in your corporate records, but you do not need to file it with the Secretary of State. Note that you will want to include provisions regarding corporate governance, transfer rights and other items in an Operating Agreement or Shareholders Agreement if there are multiple owners of your new business.
- Apply for an Employer Identification Number (EIN) online with the IRS. An EIN is the business equivalent of a Social Security Number, and you’ll use it to file your business taxes and open a business bank account. EIN registration, which can be done online through the IRS website, is relatively quick and painless if you’ve completed the steps above and you’ll receive an EIN right away at the end.
- For an S Corp only: file Form 2553 with the IRS. To elect S Corp tax status, you will need to file this form no later than two months and 15 days after the beginning of the tax year the S Corp election will take effect or any time during the tax year that precedes the tax year the S Corp election will take effect.
- Open a business bank account. To maintain your limited personal liability, you must keep business funds separate from your personal funds. If your bank requires you to set up the account in person, call ahead to make sure you bring any documents the bank requires, except the EIN.
- Make a plan for your business finances and taxes. Like personal income taxes, businesses must pay taxes at both the state and federal levels. Note that pass-through entities, such as LLCs and S corps, will also owe some taxes, such as sales taxes and employment taxes, even though the entity itself pays no income taxes. You may want to schedule an appointment with an accountant at this point. Some practical suggestions for keeping track of finances and taxes include:
- Making a list of all the finance-related tasks that occur each month, such as running payroll, may include paying yourself.
- Creating a month-by-month list of deadlines that occur quarterly or annually, such as paying quarterly taxes and filing an annual report with the Secretary of State where your business is incorporated.
- Discussing with an accountant which business expenses may be tax deductible so you can keep a clear record of deductible expenses long before tax season arrives.
- Investing in a payroll and/or accounting software. Many of these platforms will run payroll with just a few clicks of the mouse, provide payroll and tax reports that you can easily provide to an accountant, and even file quarterly taxes for you, freeing you up to focus on growth. of your business.
- Apply for any necessary licenses, permits or certifications specific to your industry. Businesses in certain industries must have permits or certificates to be authorized to do business in that particular industry. For example, restaurants may be required to obtain a business license, certificate of occupancy, food service license, sign permit, liquor license, and more.
- Research and obtain the appropriate insurance coverage for your business and industry, as appropriate. You can work with a trusted insurance broker to create a customized plan that works for your business.
By completing these steps, your business will be off to a great start!
