Creating a business entity after coming up with a business idea can seem daunting from a legal standpoint.
However, setting up your business with careful consideration and guidance will pay off over time, as you can build your business in a way that protects your personal assets, reduces your tax burden, and adds legitimacy to your business. Each state has different business forms and annual filing requirements, but the general procedure is the same.
- Select your business name. Go to the website of the secretary of state in the state you plan to incorporate and do a quick business search to make sure the name is not already taken. This search is free in many states, but some states may charge a small fee.
- going to decide which entity to use. Consider consulting a business attorney or accountant at this stage to discuss the tax implications of each entity type and receive individualized advice. Ideally, you should choose a business entity that maximizes the protection of your personal assets while minimizing your tax burden. Most private companies must be incorporated as either a limited liability company (“LLC”) or a sub-chapter S corporation (“S corporation”). Although you can run your own business as a sole proprietorship, which is an automatic status resulting from never formally forming a business entity, you may still be personally responsible for the debts and obligations of your business. there is. Here are some common differences and considerations between LLCs, S Corps, and C Corps:
- Register your business with the Secretary of State. To create an LLC, you file a “Articles of Incorporation”. To create an S Corp or C Corp, you file a “Articles of Incorporation.” The state formed may be where the business is headquartered or it may be another state as long as the business maintains a registered agent there. For most privately held companies, the easiest and most logical place to register is your state.
- Many states allow you to create an online account, submit an application, and create a new application later if needed. When the Secretary of State files your application, your application will include the date your entity legally existed.
- Prepare operating agreements or bylaws. An LLC has an “operating agreement” and an S Corp or C Corp has “bylaws”. Both documents govern the internal affairs of the business, such as how often meetings are held and how records are kept. This document will be kept in the company records but does not need to be turned over to the Secretary of State. Please note that if there is more than one owner of the new business, you will need to include clauses regarding corporate governance, transfer rights, and other items in your business agreement or shareholder agreement.
- Apply for an Employer Identification Number (EIN) online with the IRS. An EIN is the business equivalent of a social security number and is used to file business taxes and open a business bank account. You can submit your EIN online through the IRS website. After completing the steps above, you will be able to submit his EIN relatively quickly and easily, and finally receive his EIN in no time.
- S Corp only: File Form 2553 with the IRS. To elect S Corp tax status, you must submit this form within two months of the beginning of the tax year in which your S Corp election becomes effective, or at any time during the tax year prior to the tax year. there is. Elections for the S Corp take place.
- Open a business bank account. Business funds must be kept separate from personal funds to maintain personal limited liability. If your bank requires you to open an account in person, call ahead and be sure to bring the EIN and any other documents required by the bank.
- Plan your business finances and taxes. Similar to personal income tax, businesses must pay taxes at both the state and federal levels. Note that even pass-through entities such as LLCs and S corps incur certain taxes such as sales and employment taxes, even though the entity itself pays no income tax. At this point, it’s a good idea to schedule a meeting with your accountant. Actionable suggestions for tracking finances and taxes include:
- Create a list with all finance-related tasks that occur each month, such as running payroll. This includes paying for yourself.
- Create a monthly list of deadlines that occur quarterly or annually. For example, paying quarterly taxes or filing an annual report to the Secretary of State in which the business is incorporated.
- Discussing potential tax deductible expenses with your accountant can help you keep a clear record of your deductible expenses before tax season arrives.
- Investment in payroll and/or accounting software. Many of these platforms run payroll with a few mouse clicks, provide easy-to-deliver payroll and tax reports for your accountant, and even allow you to file your taxes quarterly, making it a great investment for your business. can concentrate on the growth of
- Apply for any required industry-specific licenses, permits, or certificatesBusinesses in certain industries must obtain a permit or certificate in order to be permitted to do business in that particular industry. For example, a restaurant may need to obtain a business license, occupancy certificate, restaurant business license, signature license, liquor license, etc.
- Research and acquire the right insurance for your business and industry, if neededWe can work with a trusted insurance broker to put together a customized plan that works for your business.
After completing these steps, your business is off to a great start!