Starting a business can seem complicated and esoteric, but it doesn’t have to be. If you just want some simple answers to the question of “What do I need to start a business,” look no further — we’ve got you covered.
When you’re looking to start a business, it’s important to get a few key things in place as soon as possible so that your business is “official” and legal to operate for tax purposes and government compliance requirements. This will help you avoid a lot of difficulties in the future, save time on your business operations, and hopefully save time and money on your taxes too!
Here are a few essential elements you need to start a business.
Choose a Business Name
What do you want to call your business? You can choose a business name that is simple and general, or deeply significant and personal — it’s up to you. Some entrepreneurs like to give their business a name that is more creative and memorable (which can even be trademarked). Some business owners like to set up a basic “legal” formal name for their business and then operate a different name, also known as a DBA (doing business as), “fictitious business name” or trade name. If you want to use a creative business name, be sure to do a business name search and consider getting a trademark for your business name so your intellectual property is protected.
Form an LLC (or Other Legal Business Entity)
One of the first things you should do when starting a business is to form an LLC. The LLC (Limited Liability Company) is one of the most popular forms of legal business structure for small business owners, because it’s easy to set up and flexible to manage. Sometimes it’s a better idea to set up your business as a C Corporation instead of an LLC — but only if you want the ability to accept venture capital money, grow to a large size or have shares of your company publicly traded on the stock market. Most small businesses are better off being structured as an LLC, especially if you have only one owner or “member” of the business.
So why should you form an LLC at all? Because it gives you certain legal and financial protections from the worst-case scenarios of running a business. Doing business under your own name and identity (and using a personal bank account) makes you personally liable for everything that happens with your business — including any debts or lawsuits. Setting up an LLC gives you “limited liability,” which can help provide a “corporate shield” to protect your personal assets from the possible liabilities of your business.
Setting up an LLC (or other legal business entity) also makes it possible to build credit under your business name, borrow money for your business and qualify for certain tax advantages (deductible business expenses, pass-through entity tax deductions, etc.) — which individual taxpayers who are not business owners are not always entitled to receive.
Get an Employer ID Number (EIN)
Once you’ve set up your LLC, one of the next things you should do is apply for an Employer Identification Number (EIN). This is a tax ID number for your business, similar to a Social Security Number. Having an EIN is one of the most important ways to create a separate legal identity for your business that is different from your personal identity and your personal finances. Incfile can help you get an EIN as part of the process of forming your LLC.
Set up a Business Bank Account
Once you have your EIN in hand, go to your favorite bank and set up a business banking account. Your EIN makes it possible for you to set up a business banking account, business savings account and business credit card and/or business line of credit. It’s important to have a distinct financial identity set up for your business under its own name — and be sure to keep your personal finances separate from your business.
Don’t use your business credit card to buy groceries, and don’t use your personal checkbook to pay business expenses. At tax time, you need to be able to show the IRS that your business is a legitimate entity of its own, and that you haven’t been using your business funds improperly or claiming business tax deductions you don’t deserve. Setting up a separate business banking account is one of the most important first steps to running your business in a legitimate way.
Set up Your LLC to File as an S Corporation
One of the best ways to minimize your tax burden as a small business owner if you have formed an LLC is to elect to have your LLC file taxes as an S Corporation. By filing IRS Form 2553, you can choose to have your LLC taxed as an S Corporation — which isn’t as complicated as it sounds. With just a bit of extra work by you and your accountant, you can often significantly reduce the amount of self-employment tax you’re required to pay on your LLC income. This is an excellent tax advantage for small business owners because it can help you owe less tax than you would pay on a similar amount of W-2 income as an employee.
Talk to your accountant or tax attorney for more details. If you own an LLC, you should definitely consider this strategy to reduce your tax burden and free up more money to save for retirement or pursue other business investment goals.
Set up Business Management Tools
There is a wide assortment of things you should do after forming an LLC, from setting up your business website and getting a logo to deciding which accounting tools and financial software to use. This article, “What to Do After Forming Your LLC,” has a great list of resources, ideas and specific business management tools that Incfile recommends to new business owners.
Starting a business is an exciting journey, and it all begins with choosing a name and forming your LLC (or other appropriate business entity). Are you ready to jump in?
Are you ready to start a business, form an LLC or reorganize your current business structure with business incorporation services? Talk to Incfile today. Our incorporation experts can help you evaluate your options with state-specific advice.