You’ve come up with a great new idea, you see the marketing strategy before you; you see how to make it profitable, how to grow the business, and which strategic partners you will tap. You can see the entire structure of the business from CEO to assembly line workers. You have a business plan in place to account for the logistics of transportation and the commission structure in place for a sales staff. You’ve even secured funding from friends and family, and you’ve got a bank willing to lend you the rest. You are, in a word, ready.
But now you have to actually start, and for many, this can be the first major hurdle. You can go to companies like Legal Zoom or you can contact an attorney, but there are still important decisions to make, and many business owners don’t want to start their process by relying on someone else to do the leg work.
So if you’re going to start a business, but have never done it before, the first thing you need to ask yourself is what type of business do you want to form? Will it be a corporation, LLC, partnership, or sole proprietorship? If you will have no employees and want to act a sole proprietorship, your state may simply require you file an assumed name certificate to start doing business. If you want to be a C-Corporation with full corporate protections and the ability to go public one day, you will have more stringent requirements, required annual reporting, meeting minutes, and the possibility of double taxation.
A growing trend is to file a LLC. An LLC allows for pass-through taxes – meaning the profits of the business will flow to the owners each year, rather than sit in the business. Those profits will then be taxed as ordinary income to the members of the LLC. They do, however, allow for the same write-offs as corporations, can employ people like a corporation, and provide legal protections like a corporation. They are generally cheaper to manage, have fewer reporting requirement, and are taxed favorably. But there are some drawbacks, so you need to do your research and understand what is important for your business.
Next, you need to decide where you want to form your business. And while most would say the state in which they live, that’s not always the best option. Let’s say you live in New York State, but plan to manufacture in Michigan and do the majority of your business in California – does it make sense to simply incorporate in Michigan or California? What are the tax consequences for your state?
The gold standard for the last thirty years has been Delaware. They do not charge state income tax for corporations which operate out of state, there are no taxes on intangible assets, there is no inheritance tax on corporate stock held by non-residents, shares of stock owned by non-residents are not subject to Delaware taxes, and no business licenses are required for Delaware corporations not operating in Delaware. There are also options to get your paperwork in as little as 30 minutes. The structure in Delaware was created to be extremely business friendly, and has drawn many out of state businesses there (Google, Coca-Cola, and GE, just to name a few). But, the state of Delaware requires a registered agent who lives in Delaware to act on your behalf. So if you don’t know anyone who lives there you will have to pay a third party – this can be onerous and costly, so you have to weigh out the plans for your business.
Next, you need to decide on a business name and file with your state of choice. Deciding on a business name is extremely important – it is going to be at the heart of your marketing campaign and will be a cornerstone for brand recognition. And once you’ve settled on a name, state, and business type, you need to actually file with the state. For most states, it is as simple as logging onto their Secretary of State website, following the links to the department of corporations, then answering a handful of questions and paying them. From there, you will receive your applicable articles or certificate and will officially be a business which can legally operate, sell, hire employees, and make money.
But there is still one last step – you need to file for an employer identification number (EIN) with the IRS. This is the step where many new business owners think they need help and go to third parties to do it for them, but the process actually takes less than two minutes, costs nothing, and instantly gives you the EIN. You simply go to the IRS website and click the link to apply for an Employer ID Number, answer the few questions they ask, and you’re done.
By following these steps, you will have a legally formed business capable of doing business anywhere in the United States. You will be able to collect taxes, hire employees, earn income, and pay taxes. Creating profits and building your company are up to you.