Launching a new business can be an exciting yet daunting venture. One of the most critical aspects of starting a business is ensuring you adhere to all legal requirements. This basic guide was written to familiarize you with some of the key legal steps necessary to start a new business.
1. Choose Your Business Structure
Selecting the right business structure is foundational for your new venture. Your choice will affect your taxes, liability, and operational complexity. The two main legal business structures to consider are:
- Limited Liability Company (LLC): Provides liability protection and flexibility in management. An LLC can elect to be taxed as a sole proprietorship, partnership, or corporation, depending on how many members there are.
- Corporation: A complex structure that offers liability protection and the ability to raise capital through stock. Corporations are typically taxed as separate entities (C-Corporation) but can elect S-Corporation status for pass-through taxation.
Select Tax Structure
In addition to business structures, consider how you want your business to be taxed. It is important to speak with a tax professional regarding business tax implications.
- Sole Proprietorship: Simple and easy to establish, Income is reported on your personal tax return.
- Partnership: Involves two or more individuals sharing ownership and responsibilities, with income passing through to two or more personal tax returns.
- S-Corporation: Allows for pass-through taxation, avoiding double taxation while providing liability protection. Limits on ownership may apply.
| Business Type | Liability Protection | Taxation Type | Complexity Level |
|---|---|---|---|
| LLC | Yes | Pass through, Partnership, or S-Corp | Low-Medium |
| Corporation | Yes | C-corp or S-corp | High |
Visual: Comparison Table of Business Structures and Tax Options
2. Register Your Business Name
Choosing and registering a business name is crucial. Steps to follow:
- Choose a Unique Name: Ensure your chosen name is not already in use. An internet search may help reveal conflicts with other state or national companies.
- Register Your Name: Depending on your business structure, you likely need to register with your state or local government.
- Trademark: Consider filing for a trademark to protect your brand.
3. Obtain Necessary Licenses and Permits
Depending on your industry and location, you may require specific licenses and permits to operate legally. Common types include:
- Business License: A local license to operate your business.
- Professional Licenses: Required for specific professions (e.g., medical, electrician).
- Zoning Permits: Ensure your business location complies with local zoning laws.
4. Beneficial Ownership Information Filing
New businesses must file a beneficial ownership information report, disclosing the individuals who own or control the business. This step is essential for compliance and transparency.
5. Get an Employer Identification Number (EIN)
If you plan to hire employees or operate as a corporation or partnership, you’ll need an Employer Identification Number (EIN) from the IRS. This number is used for:
- Tax Purposes: Required for federal tax reporting.
- Opening a Business Bank Account: Necessary to separate personal and business finances.
6. Designate a Registered Agent
A registered agent is an individual or business authorized to receive legal documents on behalf of your company. Hiring a registered agent service can offer several benefits:
- Privacy: Keeps your personal information off public state websites.
- Compliance: Ensures you receive important legal documents promptly.
In addition, hiring an attorney as your registered agent can come with the added benefit of a legal professional receiving and reviewing any lawsuits that you may be served with. Your attorney may be able to help connect you with other professionals to assist you with the lawsuit or other papers delivered to the registered agent attorney.
7. Open a Business Bank Account
Separating your personal and business finances is essential to maintain the corporate veil. Do not commingle business funds with personal funds. A dedicated business bank account helps you:
- Simplify Accounting: Makes it easier to track income and expenses.
- Build Business Credit: Establishing a business account can help you build credit for future financing needs.
8. Create an Operating Agreement
For LLCs and partnerships, an operating agreement outlines the management structure and operating procedures. It should include:
- Ownership Percentages: Define each owner’s stake in the business.
- Roles and Responsibilities: Specify who is responsible for what aspects of the business.
- Decision-Making Processes: Establish how decisions will be made within the business.
Conclusion
Starting a new business involves navigating various legal steps to ensure compliance and protect your interests. Taking the time to understand and fulfill these legal requirements will lay a solid foundation for your new venture.
If you need assistance with the legal aspects of starting your business, Modern Business & Estate Planning Law, LLC is here to guide you through the process.
Written by Jacob Adamson, a licensed attorney specializing in business law and estate planning, dedicated to helping clients successfully launch their businesses.