Start a Business
Thinking about starting a new business?
Well, you’ve come to the right place because in this article we are going to cover all of the basic legal requirements so that you can successfully Start a Business.
Most likely you already have a business concept in mind and perhaps even a business name and business plan, so we aren’t going to go into those types of details too much.
Instead we are going to go over the foundational steps (things that are required to legally run a business) that need to happen like registering your business, applying for the appropriate licenses and permits, and how to obtain funding to get your new business off the ground financially.
Note: If you don’t already have a business name, you will want to create one. There are some business naming resources that you can use like Domain Name Search from MyCompany Works. This helps you identify available domain names before you register which can be helpful in determining general name availability.
Let’s get started so that you can take your business idea and turn it into a real entity.
Here’s How to Start a Business:
Choose a Legal Structure
Assuming you already have a name and business plan in place (read more on that here in our Business Startup Checklist), the first thing you are required to do before you can even legally do business is choose a legal business structure.
When selecting a legal structure for your business entity, you have a few different choices:
This business type is for business owners who plan on doing business entirely by themselves and plan on being responsible for all debts and obligations of the business.
This is perhaps the most popular business structure and for good reason. LLC’s provide liability protection and tax benefits. Learn more here.
LLC’s have a lot of benefits including personal liability protection and some tax benefits as well.
Learn more about Limited Liability Company’s here and see if this is the option that is best for your startup.
This business structure is for two or more people are going to be involved in the business. Each partner is personally liable as business a owner. This structure is great for businesses with more than one founder.
If you want to separate your personal liability from your company’s liability, you may want to consider forming one of several types of corporations (S corporation, C corporation, B corporation). Although each type of corporation is subject to different guidelines, this type of legal structure generally makes a business a separate entity from its owners, and, therefore, corporations can own property, assume liability, pay taxes, enter contracts, sue and be sued like any other individual.
A nonprofit corporation is any legal entity which has been incorporated under the law of its jurisdiction for purposes other than making profits for its owners or shareholders
If you aren’t sure which business structure to choose, you should consider speaking to an attorney or tax professional and they can help you decide.
Most of these formation services also include a registered agent service for free with a business formation.
Business formation services can also help you decide and help you setup your business from start to finish.
They also offer legal advice and tax advice.
For more information on business formation services, read our post here on the best business formation services.
If you are choosing a LLC as your business structure, we have a step by step guide to setting up your LLC here.
Get your EIN (Federal Employer Identification Number)
Corporations, LLC’s, Partnerships, and Sole Proprietorships with employees are all required to apply for a Federal Employer Identification Number (FEIN).
You will need this to open a business bank account or process payroll.
If you use an incorporating service to setup your business entity, they make it easy and will obtain an EIN for you when your business is formed.
Many of them will even open a free business checking account as well.
Create your Articles
To become an officially recognized business entity, you must register with the government.
Corporations and LLC’s need an “articles of incorporation or articles of organization” document, which includes your business name, business location, business purpose, corporate structure, stock details and other information about your company.
The Articles are like your company’s birth certificate, the articles will have your start date (birth of your company) and registers you as an official business entity.
Obtain the Required Business Licenses
You can use the SBA’s database to search for licensing requirements by state and business type.
Most businesses do not require a Federal license or permit, however you should double check to make sure you won’t need one.
Examples of businesses that may require a federal permit include: investment advisors, drug manufacturing, preparation of meat products, broadcasting, ground transpiration, and selling alcohol, tobacco or firearms.
Building contractors, banks, insurance carriers, physicians, real estate agents, barbers, cosmetologists, are just a few of the occupations that require a state license. You will want to contact your state agency to find out what license requirements there are for your specific occupation.
State Licenses by Product
Liquor, lottery tickets, gasoline, and firearms are examples of products that require specific licensing.
Sales Tax Permit
If your company will be selling physical products, you may be required to collect a State Seller’s Permit or Resale Permit.
The majority of Cities and Counties will require you to obtain a business license, even if you have a home-based business.
This license grants your company the authority to do business in that city or county.
File the Appropriate Tax Forms
You also need to file certain forms to fulfill your federal and state income tax obligations.
The forms you need are determined by your business structure.
A complete list of the forms each type of entity will need can be found on SBA’s website.
You will need to check your state’s website for information on state-specific and local tax obligations.
Paying your business taxes is an ongoing part of owning a business, so you will want to be sure you understand those tax obligations or hire a tax professional who can assist.
Depending on your type of business, you may want to consider an Insurance Policy.
Although there are several types of business insurance you should consider, there are a few basic insurances that most small businesses can benefit from.
For example, if your business will have employees, you will, at a minimum, need to purchase workers’ compensation and unemployment insurance.
You may also need other types of coverage depending on your location and industry, but most small businesses are advised to purchase general liability (GL) insurance, or a business owner’s policy.
GL covers property damage, bodily injury and personal injury to yourself or a third party.
If your business provides a service, you may also want to consider professional liability insurance.
It covers you if you do something wrong or neglect to do something you should have done while operating your business.
Assess Your Finances
Many startups fail because they run out of money before turning a profit.
It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue.
If you are planning on hiring employees or contractors, you are legally obligated to pay them for their work so you want to be sure you are prepared for any expenses that will come your way.
One way you can determine how much money you need is to perform a break-even analysis.
This is an essential element of financial planning that helps business owners determine when their company, product or service will be profitable.
- Fixed Costs / (Average Price – Variable Costs) = Break-Even Point
Every entrepreneur should use this formula as a tool because it informs you about the minimum performance your business must achieve to avoid losing money.
Furthermore, it helps you understand exactly where your profits come from, so you can set production goals accordingly.
If it doesn’t sound like you will have enough cash flow to cover all of your expenses in the beginning, or you don’t have any cash reserves, you may want to consider some funding options.
Consider Funding Options
Startup capital for your business can come from a variety of means.
The best way to acquire funding for your business depends on several factors, including creditworthiness, the amount needed and available options.
Funding provides financing options for companies that experience periodic cashflow challenges, seasonal sales cycles, or small businesses that need access to working capital repeatedly for other reasons.
Here are a few funding options to get your started on your funding search:
If you need financial assistance, a commercial loan through a bank is a good starting point, although these are often difficult to secure. If you are unable to take out a bank loan, you can apply for a small business loan through the Small Business Administration( SBA) or an alternative lender.
Business grants are similar to loans; however, they do not need to be paid back. Business grants are typically very competitive, and come with stipulations that the business must meet to be considered. When trying to secure a small business grant, look for ones that are uniquely specific to your situation. Options include minority-owned business grants, grants for women-owned businesses and government grants.
Startups requiring significant funding upfront may want to bring on an investor. Investors or venture capitalists can provide several million dollars or more to a fledgling company, with the expectation that the backers will have a hands-on role in running your business.
Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers. Crowdfunding has helped numerous companies in recent years, and there are dozens of reliable crowdfunding platforms designed for different types of businesses.
Business line of credit or Business Credit Card
A business line of credit or business credit card gives your business access to cash on demand, over and over again. If you are not able to secure a grant or loan, lines of credits or business credit cards might be a better option. There are both secured lines of credit or unsecured lines of credit options.
Getting some startup funding will help with any cash flow issues that you may have when initially starting your business.
Starting a business can have some larger initial startup costs and as a small business owner, obtaining some startup funding or financing can help you meet your initial financial needs such as capital, payroll, inventory, etc.
Once all of these steps are completed or put into motion, you can rest assured knowing that you are legally allowed to do business.
This basically means that your business is recognized by the Federal Government and Local and State Governments as an official business entity.
When you want to apply for funding, or perhaps purchase real estate for your business, or when you go to file your taxes, your business has an EIN and is registered.
This is important because it legitimizes your business and makes you “official.”
For more information on stating a business, checkout our article: Business Startup Checklist – A List of things needed to Start a Business.
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