5 steps to make your new business official
In my last Google+ Hangout, we talked about whether or not you’re ready to take the entrepreneurial plunge. Over the years, I’ve talked to thousands of budding entrepreneurs with the energy, optimism, and great ideas to turn their vision into a successful business. But they don’t always have a roadmap for handling the legal aspects of launching a business.
Here’s a quick rundown of five important steps to follow for your new business. These days, it’s more than possible to handle most of the legal aspects on your own or online, but you can also talk to a tax advisor or small business attorney if you have any questions about your particular situation.
1. Make sure you can legally use your business name.
Do some brainstorming to come up with a name that represents your business – try our business name generator to get some ideas. Once you come up with an awesome name for your new business, you’ll need to make sure it’s legally available for you to use. You’ll want to check as early as possible since you don’t want to invest time and money in a name that you will need to change. Most importantly, you don’t want to be on the wrong end of a legal dispute for trademark infringement.
First, you should perform a free business name search to make sure your proposed name is available in your state. If it is available, you can take your search to the next level with a free trademark search to check if anyone has filed a trademark for your name.
2. Register your business.
After confirming your business name, you need to create a legal business 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, or DBA/sole proprietorship (or partnership). Each business structure has its own advantages and disadvantages depending on your specific circumstances. Here are a few details:
Sole proprietorship/DBA (or partnership/DBA when there’s more than one founder): This is the simplest way to register and operate a business. The biggest downside is since there’s no separation between you and your business, you will be personally liable for anything that happens in your business. That can be a big risk to take.
LLC (Limited Liability Company): This structure is very popular for small businesses, because it puts a shield between the business owner and business. At the same time, the LLC doesn’t require a lot of the heavy formality and paperwork of a corporation. Most LLCs are taxed in a pass-through way where the company’s profits are passed through and reported on the owner’s personal tax return.
Corporation: The Corporation is typically the optimal business type for larger companies that need a sophisticated stock structure, plan to go public, or want to keep the profits in the company. The Corporation’s heavy formality and paperwork can often be overkill for small businesses.
Note that your choice in business structure will have a big impact on your taxes, so it’s smart to consult a tax advisor or accountant first.
3. Get any necessary licenses and permits.
Depending on your specific business type and industry, you may need to get business licenses or permits from your state or local county/city office. For example, a food truck or tattoo artist will need more permits than a graphic designer. These licenses can include: a general business operation license, sales tax license, health department permits, and occupational or professional licenses.
If you aren’t sure which permits you need, you can start by contacting each local office or have an online service handle this for you.
4. Get a Tax ID Number.
A Tax Identification Number (TIN) is simply a number that lets the IRS track your company’s transactions. It’s also called the Federal EIN (Federal Employer Identification Number). Think of it as a Social Security number for businesses. In most cases, you will need this ID number in order to open a business bank account. Additionally, with a Tax ID number, you won’t have to give out your personal security number to every client or vendor you work with.
5. Open a business bank account.
Once your business is registered with the state (either as an LLC, Corporation, or DBA) and you have your Tax ID number, you can open a business bank account. This will allow you to accept checks made out to your business name. In addition, a business bank account keeps your personal and business finances separate – a must for Corporations and LLCs.
There is a lot to keep track of when launching a business, but don’t forget to take your legal obligations seriously. Getting your legal ducks in a row as early as possible will help set the foundation for future success. Good luck!
Image by: Cinzia A. Rizzo / fataetoile via Compfight cc