1. Deciding on a Business Form
There are various business forms to choose from. A sole proprietorship is the easiest to set up, manage, and maintain. There is minimal paperwork necessary to set up a sole proprietorship since there is no distinction between the business and the proprietor. Unfortunately, if a sole proprietorship faces a lawsuit, the owner’s personal assets are at stake.
This can be avoided by registering a Limited Liability Company (LLC) with the state. An LLC limits an owner’s liability to the investment in the company, but it requires filing separate taxes every year and can affect the business’s profit margin. Other common ways of organizing a business include corporations, partnerships, and 501c(3) nonprofit organizations. Partnerships, LLC’s, corporations or nonprofits all have advantages and disadvantages. It is wise to discuss this matter with a qualified business law attorney who can lead you in the right direction when it comes to business form.
2. Deciding on an S Corp or a C Corp
If you decide that a corporation is the right form, it is important to understand the various types of corporations. S- and C- corporate forms are available. There are several differences between a C Corp and an S Corp. The most significant is the way the two are treated for tax purposes. A C-Corp pays taxes on its profits and the principals pay taxes on the money they have received from the company. In an S-Corp, the business files a K-1 form and the profit from the business is included in the individual taxes of the principal. An S-Corp is permitted to shift some of its income from one year to the next. In addition, a C-Corp has more leeway in determining when its fiscal year starts and ends.
3. Securing an entity name and a tax ID number
Securing a tax ID number is a simple process, requiring only the filling out of forms either on the IRS website, by mail, by fax or by touchtone telephone. No fee is necessary for the application. A tax ID number may also referred to as an EIN (Employer Identification Number), is nine digits long.
4. Register with your state
In order to ensure compliance with rules governing workers' compensation, unemployment insurance, local taxes and access to other government resources, it is important to notify the state in which you operate what you are doing.
5. Obtain necessary licenses and permits
Depending on the type of business you run, different permits may be required to operate. For example, a restaurant not only requires approval by the board of health, but requires a liquor license in order to be legally permitted to serve alcohol.
We can help you decide what is necessary to start your business off on the right foot. Franz Cobos, Esq.