Once you have a business idea, setting up a business entity can seem daunting from a legal standpoint.
However, setting up your business with thoughtful 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 filings, 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 website for the state where you plan to incorporate and doing a simple business search. In many states this search is free, but in some states there may be a small charge.
- decide 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 receive personalized advice. The ideal is to choose the business entity that maximizes the protection of your personal assets while minimizing your tax burden. Most closely held companies should be formed as a limited liability company (“LLC”) or a subchapter S corporation (“S Corp”), although some can also be formed as a C corporation (“C Corp “). Although you can operate a business individually as a sole proprietor, which is the automatic status that comes from not formally forming a business entity, you can be personally liable for the debts and obligations of the business. Some general differences and considerations for LLCs, S Corps, and C Corps are:
- Register your business at the Secretary of State. To create an LLC, you will file “Articles of Organization.” To create an S Corp or C Corp, you will file “Articles of Incorporation.” The state of formation can be the location where the company is headquartered, or it can be another state as long as the company maintains a registered agent there. For the closest businesses, the simplest and most logical place to register is in your state.
- Many states allow you to create an online account to submit your filing and create new filings later if needed. Once the Secretary of State has filed your filing, the filing will list the date your entity was officially incorporated.
- Prepare an Operating Agreement or Statutes. An LLC has an “Operating Agreement” while an S Corp or C Corp has “Bylaws.” Both documents govern the internal affairs of the company, such as how often meetings will be held and how records will be kept. 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 for corporate governance, transfer rights and other elements in an Operating Agreement or Shareholders Agreement if there are multiple owners of your new company.
- 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. Filing an EIN, 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 must file this form no later than two months and 15 days after the start of the tax year the S Corp election takes effect or any time during fiscal year preceding the fiscal year. the S Corp election will take effect.
- Open a business bank account. To keep your personal liability limited, you should 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 have all the documents the bank requires, in addition to the EIN.
- Make a plan for your company’s finances and taxes. Like 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 will owe certain taxes, such as sales tax and employment tax, even though the entity pays no income taxes. You may want to schedule a meeting 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 are done on a monthly basis, such as running payroll, which may include getting paid.
- 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 company is incorporated.
- Discuss 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.
- Invest in 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 supply 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 certificates specific to your industry. Companies in certain industries must have permits or certificates to be authorized to do business in the specific sector. For example, restaurants may need to obtain a business license, certificate of occupancy, food service license, sign permit, liquor license, and more.
- Research and obtain the right insurance coverage for your business and industry, as appropriate. You can work with a trusted insurance broker to put together a customized plan that works for your business.
With these steps completed, your business is off to a great start!