Choose an entity type
When you initially form a new company, you should consider what type of legal entity to use. Here are some of the most common examples:
- LLC – Limited liability companies are some of the easiest to set up and maintain, and they are pass-through entities. This means that the profits and losses of the business are passed on to the individual owners on their personal tax returns. LLCs can be good for owning assets like real estate because of the protections they offer with “collection orders.”
- S Corporation – An S corporation has many of the tax benefits of a C corporation, but has pass through taxes. This means that the profits and losses of the business are passed on to the individual owners on their personal tax returns. You can choose S corporation status by filing a simple document with the IRS after forming a corporation in your state.
- C Corporation – A C corporation is the entity structure of publicly traded companies. Provides the maximum amount of deductions for fringe benefits and a low corporate tax rate for a small corporation. However, it is the most difficult to establish and maintain, and is also double taxed. Double taxation means that profits are taxed first at the corporate level and then on the individual tax returns of the shareholders.
- General Partnership – This is a multi-owner partnership, but all partners share equally in responsibility, ownership, and profits.
- limited liability company – This is a multi-owner partnership that offers the possibility for some partners to have limited liability, as well as limited participation in management decisions.
- Single owner – This is where you simply operate on your own behalf, or do business personally as (DBA) another name that has not been officially formed as one of the other types of entities (and therefore only you use an alias). Many people think that registering a DBA certificate with the local county office gives them a legal entity structure, but this is not the case. It’s just a fake name for your sole proprietorship. (Note that corporations and other entities can file DBAs with their Secretary of State, but that is different from what is understood here.)
Each of these types of entities has its pros and cons. Think long and hard before operating as a sole proprietor. The reason is because a sole proprietorship subjects you to full personal liability. This means that if your business is sued, your home, your car, your personal savings, and just about everything else are at risk. Consider forming an entity that provides an additional level of protection for your personal assets.
Keep in mind that each state has different laws regarding types of entities, and you should determine what your options are for the state in which you plan to form your business. Consult an attorney if his or her questions are not answered from your own research.
You can find out what entity structures are available by visiting the Secretary of State (SOS) website for the state in which you plan to form the company. We have gone to great lengths to create an index for you of all Secretary of State websites throughout the United States (on our site below). Before proceeding to the next step, please visit your respective SOS website to research what type of legal structure may be best for your type of business.
Brainstorm entity names
Once you’ve determined the type of legal entity to use, brainstorm some names for your company. Write 3-5 names now. In a later step, we will illustrate how to choose the best name.
- Find Secretary of State – Search to see if your name is available on the Secretary of State’s website for your company’s home state. Otherwise, you need to cross that name off your list. The reason is that the SOS will not allow you to form a company under that name, regardless of whether the existing company is in your industry or not. In other words, that name is taken and cannot be re-registered in that state.
- Search the United States Patent and Trademark Office – Search to see if anyone else has a trademark with the USPTO that is identical or similar to its name. If so, is it a really famous brand or are they in a similar industry, so your customers may also be your customers for similar products? If yes to any of the questions, then you should cross that name off your list to err on the side of caution. Otherwise, continue to step 3 to do more research on the current name.
- Search State Registry of Trademarks – Does anyone else have a trademark registered with the Trademark Registry of the state in which you plan to form the company? Each state maintains a trademark registry for businesses that have registered that name with the state. You must repeat step 2, but for your state.
- Search in search engines – You should search one or more search engines like Google, MSN and Yahoo to see if someone in your industry is already using the name.
Form the Legal Entity
Now that you’ve chosen your legal entity type and determined what name to use for your business, it’s time to file with the Secretary of State for the state in which you plan to organize the business. Please note that the state in which you form the
The company does not have to be from the same state in which you live. Some states have more business-friendly laws than others. However, such an explanation is beyond the scope of this plan.
You have several options for forming the company. You can hire an attorney, complete the paperwork yourself from the SOS website, or hire another third-party service, such as American Incorporators. to file the papers for you. There are many other companies, such as Socrates Media and Legal Zoom, that sell forms to help you complete the training yourself.
Get an EIN from the Internal Revenue Service
As soon as you receive confirmation from your SOS status that the business has been officially formed, you must obtain an Employer Identification Number from the IRS. Sign up to get a EIN on the IRS website, or by calling the EIN department at: (800) 829-4933.
An EIN is a social security number for a business. You will need it to open bank accounts, file taxes, etc.
Obtain other required licenses
You should also make sure you have the licenses required by your state for the type of business you are operating. For example, some types of businesses must have a license before operating, such as lawyers, insurance agents, restaurants, daycare centers, etc. Your county government office can point you in the right direction if you’re not sure.
Create the Company Logbook
The time has come to set up the company logbook.
The easiest way to create and organize your business log book is to purchase one from a service like Legal Zoom or Socrates Media. “Corporate kits” usually have a nice folder, sample forms, folders to store the various types of documents you need to keep, stock certificates printed with your company name (if applicable), etc. You will need to keep company records for a period of time, so take the time to organize them in advance. you will be glad you did.
Document Future Deadlines
In the world of entrepreneurship, you have a lot of deadlines to meet to keep the various government agencies off your back. Estimated quarterly income taxes, annual or semi-annual operating statements with your state SOS, sales tax returns, employment statements, business tax returns (in addition to your personal tax returns), etc.
Business owners generally have to file quarterly estimated taxes with both the IRS and the home state. In other words, you’ll need to make income tax payments throughout the year to avoid being penalized if you didn’t pay enough at the end of the year. It is not enough that you catch up at the end of the year. In fact, they can penalize you for not paying it in more even installments. You can find links for the Departments of Revenue for all 50 states and the IRS on our Innoventum website.