Starting a business begins with an idea. From there it takes time, dedication, hard work, and a lot of paperwork. Being your own boss and owning your own business is the American dream! Our business startup guide will help you to understand what it actually takes to properly start a business.
Steps to Starting Your Business
Many “How to Start a Business” guides will tell you that the first step to starting your business is to create a business plan or wrangle some investors. The reality is that what you really need, more than anything else, is nuts and bolts proof of concept. Can you really get people to pay for your product or service? You need to test the waters and make some sales—and to do that, you’ll need to get your business legally operable quickly.
1) Choose a Business Structure
The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.
Here is a quick overview of three of the most popular business structures.
- Sole ProprietorshipA sole proprietorship is an unincorporated business owned and run by a single individual with no distinction between the business and the owner. A sole proprietor is entitled to all profits, but is also on the hook for the business’s debts, losses and liabilities. As a result, sole proprietors often have a more difficult time with raising money for their business.
- CorporationA corporation is a business structure that enables its owners to establish their company as a separate legal entity, and as such, corporations are wholly separate from the people who own and operate them. Advantages of a corporation include limited liability, the ability to raise capital and transfer shares of stock, as well as perpetual existence. Disadvantages include “double taxation.” By default, corporations are taxed as C corporations, meaning company income is subject to corporate income tax. Shareholders are also subject to taxes on the distributions they receive—meaning this income is essentially taxed twice.
- Limited Liability CompanyA Limited Liability Company (LLC) is a hybrid legal business structure that is typically ideal for small businesses and entrepreneurs. Specifically, LLCs have the limited liability of a corporation. However, by default they receive the pass-through taxation of a partnership or sole proprietorship. LLCs are the preferred choice of small business owners because they are easy to operate and can avoid the “double taxation” imposed on C corporations.
What about S Corporations?
S Corporations, commonly referred to as S Corps, may sound like business entities, but they are actually a tax designation under subchapter S of the Internal Revenue Code. Whereas LLCs and corporations are formed when they file legal paperwork with their respective state, an S Corp is designated when an already existing LLC or corporation files a form with the IRS.
S Corps are organized and operated much like corporations, but they receive “pass-through” taxation like a partnership. Both LLCs and corporations can choose to be taxed as S Corps. S Corps are often used by corporations seeking to avoid “double taxation.” LLCs often choose S Corps so that they can make distributions, which aren’t subject to self-employment taxes.
Once you’ve chosen your business’s legal structure, the next step is to file paperwork with the state to create your business as a legal entity.
2) Make Your Business Legal
If you want an LLC or corporation, you’re at the stage now where it’s time to legally form your business. (Sole proprietorships don’t require state registration to form—but they don’t get any liability protections or tax options either.) You can form your business on your own, many do, or you can hire a professional formation service like us. When you use Active Filings to form your business, you’ll save time and energy, lower your risk of issues with your filings, and get our best-in-class registered agent service.
If this is as far as you want to go, and you’d rather hire a professional to incorporate your business, we can help. You can form your LLC or corporation today, simply visit our Incorporation Packages page. However, if you plan to do it on your own, here are the steps.
- Choose a name for your business. When you name your business you’ll need to include an entity identifier such as “Inc.,” for corporations, and “L.L.C.,” for limited liability companies. The name you choose must not already be in use in your state of formation. Use our Free Business Name Search to see if your name is already taken.
- Hire a registered agent. Technically you can act as your own registered agent, but as a new business owner strapped for time, you may not want to add another item to your plate. Your registered agent plays an important role in not only forming your business, but also in keeping your business in tip top shape with the state, accepting legal mail for your business and serving as point of contact with the state.
- Your next step is to incorporate your business with the state. To form a business entity, you must file a formation document with a state agency, typically the Secretary of State. LLCs file Articles of Organization; corporations file Articles of Incorporation.
The information that you will need to file your articles typically includes:
-Ownership, management structure, or directors
-Registered agent name
-Registered agent address
-Number and value of shares (if you are forming a corporation)
-Signature(s) of whomever is submitting the filing
You often have the choice to have your formation paperwork processed online, though most states still allow for submissions by mail. Have a credit/debit card or checkbook ready to pay state filing fees, which range from under a $100 to over $500, depending on the state of formation.
Once the state has accepted your articles, your business is formed and is now a legal entity in the eyes of the state. Your state may require that you file additional documentation with your local tax board or franchise tax board. These filings are typically called Initial Reports, and most often need to be filed within 30 to 90 days after your business registers with the state.
3) Obtain any federal and state licenses or permits
Depending on what type of business you plan on starting, you may have to obtain state and local business licenses. For example, business activities that are commonly regulated include veterinary services, yoga studios, roofers, plumbers, barbers and salons, farming, and bars and restaurants. Industry requirements often vary by state, but a visit to your Secretary of State’s website should help you find out which permits and licenses you need, as well as how much money you’ll need in reserve in order to pay for them. If your business doesn’t need any special licensing you can skip this section, but it pays to be safe. Operating a business without proper licenses or permits can result in fines and possible closure of your business.
4) Get a Federal Tax ID
An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is used to identify a business entity. Think of it as your business’ social security number. You can acquire an EIN one of two ways. You can get one for free through the IRS website, or you can hire Active Filings to save you the hassle of dealing with the IRS. When you hire us to incorporate your business, we can acquire your EIN in 24 hours or less for $50. When you order our Sprinter or Finisher plans, EIN obtainment is included.
To acquire an EIN yourself simply visit the IRS website, complete a questionnaire, and if you have a US social security number you’ll have your EIN in about 10 minutes at no cost to you. You can also find IRS form SS-4 here. You can mail or fax the form old school style if you wish, but filing online or hiring Active Filings to obtain your EIN is definitely the fastest and most efficient way. If you are a not a US citizen or do not have a social security number, the process can be much more time consuming.
5) Open a business bank account
There are many reasons to open a business bank account, but probably the most important reason is because you don’t want to mix your personal and business finances. For starters, mixing the two can be a real pain come tax season. Beyond that, if you don’t separate your financials from your LLC or corporation, you could potentially lose personal liability protection. That means creditors could come after your personal assets if your business goes into debt or is party to a lawsuit.
Opening a business bank account is also one step to establishing business credit for your company, something that can help you qualify for extra financing as your business grows. Having a business bank account allows you to accept payments from customers, pay your employees, write checks to suppliers, and look like the professional enterprise you are.
Beyond Business Startup
You’ve finally jumped through all the hoops to start your business. Take a moment and enjoy it because soon enough you’ll be having to pay attention to basic business maintenance like filing annual reports, paying taxes, and making sure all fees are paid for any licenses and permits that your business needs.
As a business owner you’ll need to ask the right questions and follow the right legal guidelines in order to be successful. Hopefully our business startup guide provides you with a basic overview of the many steps required to successfully start a business. Now with the long slow slog of business startup out of the way, you’re ready to start making money.
If you’re looking at starting a business, Active Filings can get you set up fast and take care of the details for you.
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