Deciding to start your own business is a big step, one that requires special planning and thought. But where do you start?
There are many logistical steps to setting up a legal, operating business and it can be a daunting mountain to climb when first starting. We’ll take a look at some of the essential tasks you need to check off before you even make your first sale or create your first product. For the sake of this article, we’ll assume that you’ve done some research on the area of business you want to go into and you’ve decided that were you to start your own business, you could be profitable and successful.
Entity Type
You’ll want to start with the legal side of operating a business to make sure you’re complying with all federal and state laws. Decide what type of business entity you would like to establish. This will determine which income tax return form you will have to file and how you, the owner, will be taxed as well as your liability. The most common entity types are:
Sole Proprietorship – an individual who owns and operates a business. All income/expense is reported on the individual’s tax return.
Partnership – two or more persons who join to carry on a trade or business, each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Partnerships must file an annual return (Form 1065) with the IRS although the partnership itself does not pay income tax. Income instead passes through to each partner based on his or her share of the partnership’s income. Partners do not receive a W-2 from the partnership but rather, a K-1 which is then reported on their personal tax return.
Corporation – For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity that exists separately from its owners. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax.
S Corporation – S corporations are corporations that elect to pass corporate income/losses through to their shareholders. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.
Limited Liability Company – A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.
Choose a Name
Choosing a name for your business is an important step. A good business name will reflect your brand identity as well as what types of goods and services you offer. Once you decide on a name, you’ll want to register it and protect it. There are multiple ways to register your business name and some may be legally required.
Check with your state for rules about how to register your business name.
Register Your Business
Your location and business structure determine how you’ll need to register your business. For most small businesses, registering your business is as simple as registering your business name with state and local governments.
Federal and State Tax IDs
Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business and license permits.
It’s free to apply for an EIN, and you should do it right after you register your business.
Apply for licenses and permits
Requirements and fees depend on your business activity and the agency issuing the license or permit. It’s best to check with the issuing agency for details on the business license cost. You’ll have to research your own state, county, and city regulations. Industry requirements often vary by state. Visit your state’s website to find out which permits and licenses you need.
Open a business bank account
As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account.
Starting a business?
If you’re starting a business, we’re happy to help. Please feel free to reach out any time.