How to Start a Business

You have a business idea, and you’re ready to start building an entity that will take your concept and make it a reality. Starting a business isn’t an easy endeavor, but you’ll hear that the journey is a rocky and rewarding one if you speak to other entrepreneurs.

You want to start your business on a solid foundation, which means doing your due diligence and making sure that you’ve covered your basis legally. Below is a guide to help you understand how to form a business.

Step 1: Research and Create a Plan

The first step is an important one. You need to research to see if there is anyone else doing what you want to do. If there is competition, you’ll have to figure out what makes you different.

If there isn’t anyone else doing what you want to do, you’re going to have to research to find out if there is a market for your product or service. Creating a business plan is essential for you, as it acts as your guide for the business you want to build, and if you’re going to need financing, the bank will want to see it too.

Step 2: Choose a Name

You want to choose a name that is in alignment with your business brand. Once you’ve found the name, you will want to register it. There are four different facets to solidify your business name:

Entity Name

Registering your entity name protects you at the state level. You’ll need to check with your state about the rules about how to register your business. Typically, states do not allow duplication of an entity name; however, there are exceptions based on the business structure.

Trademark

Registering a trademark protects you at the federal level. You can trademark your business name, products, or services. Once you do this, no one in the same or similar industry can use that name. You’ll want to check the trademark database to ensure the names of your business, products, and services are available.

Doing Business As (DBA)

You can register your business name as a DBA. Doing so doesn’t give you legal protection, but it might be legally required. When you register your business as a DBA, you can file for a federal tax ID number, which will be needed to open up a business bank account. Check with your county and state government to see what the DBA requirements are.

Domain Name

Registering your domain name protects your business website address, covering you locally, nationally, and internationally. Once you register your domain name, it’s yours as long as you continue to renew it.

If your business name is already taken by another business, you can play around with the domain name; it doesn’t have to be the same as it appears on your business registration. You want to make sure the company you purchase your domain from is an accredited registrar.

Step 3: Form Your Business Entity

There are many forms your business can take. Each type of business comes with different liabilities, tax structures, and articles of incorporation. It’s crucial to find the form of business that makes sense for you and that you’re clear on your responsibilities regarding liabilities and taxation.

Remember, you will need a registered agent for the service of processing if you choose a Limited Liability Company, corporation, partnership, or nonprofit to register with your state.

Sole Proprietorship

This form of business registration is easy to do since it involves you as the business owner and operator. The risk for this type of business is that there is no separation of business and personal assets or liabilities.

You, as an individual, are responsible for the debts and obligations of the company, and your assets aren’t protected should a client pursue litigation against you for any reason.

Partnerships

This type of business is an excellent choice for companies with more than one owner, such as groups of accountants or attorneys. There are different types of partnerships, and each has its liability and tax implications.

Limited Partnerships

The majority of partners have limited liability, and there is one general partner with unlimited liability in limited partnerships. In a business setup like this, limited liability also means little control over the company.

A partnership agreement outlines the terms clearly. Partners claim any profits distributed on their tax return, with the general partner paying tax as a self-employed individual.

Limited Liability Partnerships

Limited Liability Partnerships (LLPs) are similar to limited partnerships. The difference between the two is that LLPs give all partners limited liability and protect them from debts against the partnership. This protection also means that each partner isn’t responsible for the actions of the others.

Limited Liability Corporation

A Limited Liability Corporation (LLC) is a business structure that allows you to take advantage of the corporation and partnership business structures. This business structure is the right choice for medium or high-risk businesses, where the owners want to take advantage of lower tax rates than corporations.

This business structure is also attractive for business owners that have significant assets they would like to protect.

The LLC business structure has a limited lifespan in many states, where the state may require dissolution and reformation of the LLC any time a member joins or leaves the corporation.

Dissolving or reforming may be avoided if there is an agreement to buy, transfer or sell ownership. Consult state rules to see what is necessary should any changes to the LLC structure need to be made.

C Corporation

A corporation, sometimes referred to as a C corp, is considered a completely separate entity from the founders. Corporations can be profitable, taxed, and held legally responsible. This business structure offers the most robust protection from personal liability.

For this reason, it is one of the most expensive business entities to form. It also requires extensive reporting, which means detailed record-keeping and operational processes.

One of the drawbacks to this business structure is that profits get taxed twice in this form. Gains are taxed when the corporation pays its taxes, and then a second time when shareholders receive their dividends.

One of the benefits of this business form is that the corporation is independent of its shareholders, so nothing changes when shareholders do. This structure also permits the corporation to raise capital by selling stock.

C corps are the right choice for medium or high-risk businesses, businesses that need to make money, and businesses that plan to go public or to be sold eventually.

S Corporation

An S Corp is a particular type of corporation that avoids the tax consequences of the C corp. This structure allows for profits and some losses to be transferred directly to owners’ income without being taxed corporate rates.

You must apply with the IRS to get S corp status. You should know that not all states tax S corps equally.

While most states recognize S corps in the same manner the federal government does, others tax S corps on profits above a defined limit, other states don’t recognize S corps at all, and they charge the corporate tax on gains.

You will have to research or speak to an expert to determine how your state handles S corp taxation.

B Corporation

A B corp is a benefit corporation. This structure is for businesses that want to generate a profit, driven by a mission to produce a public benefit. Some states recognize B corps, some of which require submitting an annual benefit report to demonstrate their contribution to the public good.

B corps differs from C corps in purpose, accountability, and transparency, but not for taxation.  While third-party organizations offer B corps certification services, certification isn’t necessary for a company to be legally considered a B corp.

This certificate of formation won’t mean much if the state you’re operating your business in does not recognize B corps. Check with your state to see if B corp status is a legal status for your operating agreement.

Nonprofit

This form of business entity registration is for organizations that do scientific, religious, literary, education, or charity work. Nonprofit organizations are exempt from state and federal taxes because the work they do benefits the public. In addition to registering with the state, the organization must file with the IRS to get tax exemption status.

Nonprofits are similar to C corps in terms of their organization and reporting. They do face specific rules about what can be done with any profits that the organization generates. Members and political campaign donations as recipients of profits are not permitted.

Cooperative

A cooperative is a business structure where the organization is owned and operated to benefit those using the services. There is an elected board of directors and officials that direct the cooperative’s operations, and members have voting power to control where the cooperative is headed.

While members can purchase shares to be a part of the cooperative, the number of shares doesn’t increase the power of one person’s vote.

Step 4: Obtain Necessary Licenses and Permits

Depending on your business’s nature, you may require state or federal licenses and possibly regional ones as well. You will have to check if the industry of your business needs a national license.

You will also have to look at the filing fees for these licenses and whether they have an expiry date. You’re going to want to be on top of all of the business licenses and permits you will need to operate your business legally.

Step 5: Register for Taxes

You will need to register for an Employer Identification Number (EIN). You’ll need this number to hire employees, apply for business permits and licenses and open a business bank account.

The need to get a state number depends on whether or not you have to pay state tax. It’s best to speak with an accountant once you decide what type of business entity you want to start, so they can advise you on what you need to do to meet your tax obligations.

Step 6: Set Up Business Finances and Accounting

You should seek the help of a bookkeeper to help you manage your business finances and accounting. If you feel confident of getting started on your own, one of the first steps you’ll have to take is to set up your business accounts, also known as your general ledger.

Setting up the general ledger can be done with accounting software, a spreadsheet, or pen and paper. You’ll also have to decide on what bookkeeping method you will use.

While some companies use single-entry, double-entry is more common. It is vital to track all financial transactions so that your reports present a clear picture. You will have to set a schedule for when you balance your books and prepare financial statements to do regular check-ins on the business finances’ health.

You must store your records securely so that they are accessible to review any discrepancies and provide backup during tax season.

It’s always good to have another set of eyes review the books, so don’t be afraid to ask for help.

Step 7: Get Insured

Even though some business structures protect against personal liability, it is essential to insure your business to cover things that your business structure doesn’t. You want to review your insurance needs before opening up the doors for business, especially if you plan to run a home-based business.

The six most popular types of business insurance include:

• General liability insurance
• Product liability insurance
• Commercial property insurance
• Home-based business insurance
• Business owner’s policy

Some companies will require proof of insurance before agreeing to hire you. It would be best to speak with an insurance expert to review your needs and the available options.

Step 8: Promote Your Business

Now that you’ve got the foundation for your business set up, it’s time to market and connect with potential customers so you can start to generate some revenue. Your business plan should outline the marketing strategy and give you an idea of your marketing and promotion budget. While social media is a great platform to gain visibility for your products and services, you’re going to have to spend money to acquire real visibility.

When you’re learning how to form a business, the key is to know your target market, where they hang out, and connect with them there. You don’t have to be on every social media platform if your ideal customers aren’t there.

Focus on spending your money where you will get the greatest return, and that’s where your people, your dream customers, are spending their time.