When you want to start a new business, countless questions arise. What do I need to do to make my business legal? Do I need any special permits? How do I make sure I don’t pay more than I have to in taxes? Here we’ll cover some of the steps to start a business… so you can make sure your new venture is starting off the right way and you can avoid any pitfalls for years to come.
Step One: Register your business with the state
Before anything else, you need to create a legal entity in your state. This essentially registers your new business and gives you the legal foundation to move on to the next steps.
You will register your business as a corporation, LLC, partnership, or DBA/sole proprietorship. Each type differs in terms of how you pay taxes, how much paperwork you need to file, and what happens if you get sued. Here are some of the basics:
- Sole proprietorship/DBA (or partnership/DBA when there’s more than one founder): This is the simplest way to register and operate a business. In this case, there’s no separation between the business and the owner(s). The biggest downside is since there’s no distinction between the individual and the business, you will be personally liable for anything that happens in your business. That can be a big risk to take.If you have a sole proprietorship/partnership and you want to operate your business under a different name (i.e. Jane’s Company or Accounting by Jane), you will need to file a Doing Business As (DBA) with the state.
- LLC (Limited Liability Company): This structure is very popular for small businesses. Why? Because it puts a shield between the business and the owner to help protect you from any personal liability. But at the same time, the LLC doesn’t require a lot of the heavy formality and paperwork of a corporation (of course, there will be more paperwork involved than with the sole proprietorship).Most LLCs are taxed in a pass-through way where the company isn’t taxed on profits; rather, profits are passed through and reported on the owner’s personal tax return. This is often more advantageous for the small business owner.
- Corporation: The Corporation is typically not recommended for small business owners, since there’s so much formality involved. This structure is a better option for businesses that need a more sophisticated stock structure, plan to go public, seek VC funding, or invest profits back into the company.If you do opt for a corporation, you will need to determine how you want to be taxed. Many small businesses prefer something called “S Corporation” tax treatment, where company profits are “passed through” and reported on the personal income tax return of the shareholders.If you’re interested in learning more about business structures, you can try CorpNet’s Business Structure Wizard to find the best structure for your business.
Step Two: Get any necessary licenses and permits
After you’ve selected the right entity for your business and registered it with the state, then you need to find out if your business needs to apply for any permits or licenses. Think of it this way. Registering your business (i.e. filing a DBA or LLC) gives you a legal foundation; then licenses and permits give you a ticket to operate your business.
Different business types and states have different license requirements. A restaurant or tattoo parlor will need more permits than a home-based writer. Examples of licenses and permits include: a general business license, sales tax license, health permit, home occupation permit, and professional licenses.
To determine what type of licenses and permits you need, you can contact your state, county, and city and inquire yourself. Or, you can use a service, such as CorpNet’s Business License Research Package that provides you with customized research based on your business activities and location.
Step Three: Keep your business compliant
Once you’ve got your business started off the right way, your legal work isn’t done. You need to keep up with various state filings to keep your business compliant. Otherwise, you might find yourself racking up penalties and fees, and your business could even be called non-compliant, suspended, or dissolved altogether.
If you are concerned about how to keep a new or existing business compliant, you can sign up for CorpNet’s B.I.Z. service. Completely free, the service will send you timely reminders whenever a filing deadline is coming up.
This allows you to focus on running your business without worrying that an important legal requirement has slipped through the cracks. After all, you didn’t launch a business just to handle paperwork, so take advantage of any tools that make these tasks easier.