So you want to start a business? 10 Legal Steps to Building a Successful Business Entity | Ward and Smith, Pennsylvania
Once you have a business idea, setting up a business entity can seem daunting from a legal standpoint.
However, building your business with thoughtful attention and guidance will pay off over time, as you can structure your business to protect your personal assets, reduce your tax burden, and build legitimacy for your business. Each state has different requirements for business formation and annual filings, but the same general steps apply:
- Choose a business name. Make sure the name isn’t already in use by going to the Secretary of State’s website for the state where you’re considering incorporating and doing a simple company search. In many states this search is free, but in some states a small fee may apply.
- Decide which business entity to use. At this point, consider consulting a business lawyer or accountant to discuss the tax implications of each type of entity and receive personalized advice. You will ideally choose the business entity that maximizes the protection of your personal wealth while minimizing your tax burden. Most closely held businesses must be incorporated either as a Limited Liability Company (“LLC”) or as a Subchapter S Corporation (“S Corp”), although some may also be incorporated as a C Corporation (“C Corp”). Although you can operate a business individually as a sole proprietor, which is the automatic status that arises from not formally creating a business entity, you may be held personally liable for the debts and obligations of the business. Here are some general differences and considerations for LLCs, S Corps, and C Corps:
- Register your business with the Secretary of State. To create an LLC, you will file “Articles of Organization”. To create an S Corp or C Corp, you will file “Articles of Incorporation”. The state of formation can be where the business is headquartered, or it can be another state as long as the business maintains a registered agent there. For the most closely held companies, the easiest and most logical place to register is in your own state.
- Many states allow you to create an online account to submit your filing and create new filings later if needed. After the Secretary of State files your case, the case will show the date your entity officially came into existence.
- Prepare an operating agreement or bylaws. An LLC has an “operating agreement,” while an S Corp or C Corp has “articles of association.” Both documents govern the internal affairs of the company, such as the frequency of meetings and how records will be kept. You will keep this document in your company records, but you do not need to file it with the Secretary of State. Note that you will want to include provisions regarding corporate governance, transfer rights, and other items in an operating agreement or shareholders’ agreement if there are multiple owners of your new business.
- Apply for an Employer Identification Number (EIN) online with the IRS. An EIN is the business equivalent of a Social Security number, and you’ll use it to file your business taxes and open a business bank account. The EIN filing, which can be done online through the IRS website, is relatively quick and painless if you have followed the steps above, and you will receive an EIN immediately upon completion.
- For an S Corp only: File Form 2553 with the IRS. To elect S Corp tax status, you will need to complete this form no later than two months and 15 days after the start of the tax year, the S Corp election will take effect or at any time during the year tax preceding the tax year. the S Corp election will take effect.
- Open a business bank account. To keep your personal liability limited, you must separate your business funds from your personal funds. If your bank requires the account to be set up in person, call ahead to make sure you bring all the documents required by the bank, in addition to the EIN.
- Make a plan for your business finances and taxes. Just like personal income taxes, businesses must pay state and federal taxes. Note that even flow-through entities, such as LLCs and S bodies, will owe certain taxes, such as sales taxes and employment taxes, even if the entity itself does not pay taxes on the revenue. You may want to schedule a meeting with an accountant at this point. Here are some practical suggestions for tracking finances and taxes:
- Make a list that contains all finance-related tasks that occur monthly, such as managing payroll, which may include paying yourself.
- Create a month-by-month list of quarterly or annual deadlines, such as paying quarterly taxes and filing an annual report with the secretary of state where your business is incorporated.
- Discuss with an accountant which business expenses may be tax deductible, so you can keep a clear record of deductible expenses well before tax season.
- Invest in payroll and/or accounting software. Many of these platforms will run payroll with just a few mouse clicks, provide payroll and tax reports that you can easily provide to an accountant, and even file quarterly taxes for you, freeing you to focus on the growth of your business.
- Apply for the necessary licenses, permits or certificates specific to your industry. Companies in certain industries must have permits or certificates in place to be allowed to do business in that industry. For example, restaurants may be required to obtain a business license, certificate of occupancy, food service license, sign permit, liquor license, etc.
- Research and obtain the appropriate insurance coverage for your business and industry, if applicable. You can work with a trusted insurance broker to develop a custom plan that’s right for your business.
Once these steps are completed, your business will be off to a good start!