Select a Name and Legal Structure
There are many different legal structures available for a new business. The three listed below are those most people know, but if you are interested in a more complicated structure, you will need an attorney.
Sole Proprietorship/Partnership – This is the simplest entity organization. One or more individuals own and run the organization, share in the profits and losses, and are personally responsible for the debts and obligations of the organization.
- Easiest to start up and run, requiring no filing of documents with the Secretary of State
- No formalities like shareholder meetings, operating agreements, or regular filings
- Most business losses can be deducted from personal tax returns
- Personally responsible for the debts and liabilities of the organization
- May be personally liable for the negligence of your partner
- Organization is less stable when partners change or leave
Corporation – An independent legal entity separate from the organizations’ owners. Controlled by shareholders, a board of directors, and officers. There can be significant tax consequences for selecting a corporation, but the owners benefit from little to no personal liability.
- Not responsible for the debts or liabilities of the organization
- Simpler process for changing the participants, including shareholders and directors
- Generally, corporation pays taxes, and owner pays taxes on income from the corporation
- Significant formalities required in terms of documents and meetings
- Filing with Secretary of State required, as well as substantial filing fee
Limited Liability Company (LLC) – A compromise between the Sole Proprietorship/Partnership and Corporation options. Provides more choice to the members with less liability.
- Owners are not personally responsible for the debts or liabilities of the organization
- Choice to how you are taxed, either like a partnership or like a corporation
- Fewer corporate formalities than a corporation
- Must file with the Secretary of State and pay the filing fee
If you have chosen an LLC or a Corporation as your business structure, there are additional steps to take in starting your business, including drafting documents and filing with the Secretary of State. An attorney’s assistance in drafting the documents is highly recommended.
Corporation Additional Steps
- Designating Board of Directors: The Board of Directors are responsible for overseeing the corporation and are ultimately responsible for the corporation’s acts
- Registering – Articles of Incorporation: Corporations usually register in the state in which they will be doing most of their business, but some corporations choose to incorporate in others states for tax reasons. Each state will have a different filing fee which can run from anywhere from $50 up to $500.
- Bylaws: Bylaws set forth the operating standards of the corporation and are a required step in organizing a corporation. An attorney should assist in the preparation of this document.
- Shareholder Agreement: A Shareholder Agreement is not required, but it is prudent to create one and include information such as the shareholders’ rights and responsibilities.
- Open Accounts in Corporate Name: A corporation is a separate entity, and therefore will need to have bank accounts opened in its name. A corporation cannot have a bank account in an individual’s name.
- Hold Official First Corporate Meeting: The first meeting is when stock shares will be issued to the initial stockholders. The Board is responsible for setting the price of each share.
- S-Corporation: All S-Corporations start off as a C-Corporation and must elect to become a Small Business Corporation (S-Corp) by filing the appropriate documentation. S-Corps have additional restrictions but allow for increased tax benefits.
LLC Additional Steps
- Draft and Sign Operating Agreement: Not every state requires an operating agreement, but it is a highly recommended to allow allocation of losses and profits in a way that is different than your state’s default rules.
- Draft the Certificate of Organization: A Certificate of Organization is required by every state and must include your LLC’s name and principal place of business, the LLC’s purpose, and the name and address of your LLC’s registered agent. An attorney should assist in the preparation of this document.
- File Certificate of Organization: The Certificate of Organization must be filed with the Secretary of State office.
- Register Additional LLC Names: Some businesses choose to do business under a name different than the one filed in the Certificate of Organization. Each of these names must be registered.
Write a Business Plan
The purpose of a business plan is two-fold. First, it provides a roadmap for the running of your new business. A successfully drafted business plan involves your marketing plan, sales, website design, and everything else that goes into running your business. The better your roadmap, the clearer your path to success. Second, investors and financial institutions want reassurance that providing capital to your business is a smart choice. Most will require a business plan, and the better your plan, the more successful you will be in obtaining the necessary capital to move your business forward.
Obtain your Employer Identification Number (EIN)
If you are organized as a Corporation, LLC or Partnership (or a sole proprietorship with employees), apply for an Employer Identification Number (EIN) from the IRS, which will be necessary to open a bank account or process payroll.
Open the Company Bank Account
Contact the bank first to see what their specific requirements are to open a business checking account.
Lease Office, Warehouse, or Retail Space (if not home-based)
This includes planning for furniture, decorations, and utilities.
Obtain Licenses and Permits
Federal Permits – Depending on the type of business you are in, you may need a Federal license or permit. Most businesses do NOT require a Federal license or permit. However, if you are engaged in one of the following activities, you should contact the responsible Federal agency to determine the requirements for doing business:
- Investment advising
- Drug manufacturing
- Preparation of meat products
- Ground transportation
- Selling alcohol, tobacco, or firearms
State Licenses – Some professions require a State license or permit. Laws vary from State to State. However, if you are engaged in one of the following professions, you should contact the responsible State agency to determine the requirements for your business:
- Building contractors
- Insurance carriers
- Real estate agents
- Private investigators
- Private security guards
- Funeral directors
- Bill collectors
Some state licensing requirements are based on the product sold. Contact your state licensing authorities to determine the licensing requirements of your business. For example, most states require special licenses to sell:
- lottery tickets
Sales Tax Permit – If your company sells physical products within the state where it does business, you may have to collect and pay sales tax. This is usually accomplished by obtaining a State Seller’s Permit or Resale Permit.
Business License – Most Cities or Counties require you to obtain a business license, even if you operate a home-based business. This is a license granting the company the authority to do business in that city/county.
Hire Employees (if applicable)
If you intend to hire yourself or others as a full or part-time employee of your company, then you may have to register with the appropriate State Agencies or obtain Workers Compensation Insurance or Unemployment Insurance (or both).
Set up an Accounting and Record-Keeping System
Company documents generally are required to be kept for 3 years, including: a list of all owners and addresses, copies of all formation documents, financial statements, annual reports, amendments or changes to the company. All Tax and Corporate Filings should be kept for at least 3 years.
Obtain Business Insurance
Shop around and make sure you are comparing apples to apples.
Systemize and Organize
Try to make the operational aspect of the business as automated and efficient as possible so you can concentrate on growing your business.
Develop a Business Identity
Order business cards, letterhead, and promotional materials for your business. A professionally created logo can make your business look professional and established. You should also trademark, register, or copyright your business name and identifying marks like slogans and logos. Below is a description of the differences between trademarking, registering, and copyrighting to help you consider which is best for your business.
Trademark (TM): A trademark is used for terms, slogans, logos, and other indicators. It does not guarantee protection under trademark law, but it gives notice to potential users that they may be committing infringement.
Service Mark (SM): A service mark is the same as a trademark, but protects services rather than a term, slogan, logo, or other indicator.
Registered (R): The R means a trademark has been registered with the United States Patent and Trademark Office (USPTO).
Copyright (C): A copyright protects the copy, distribution, or performance of an artistic, literary, or musical work.