EVERYTHING YOU NEED TO KNOW ABOUT STARTING A NEW BUSINESS IN THE U.S.
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FORMING A NEW BUSINESS
TYPES OF BUSINESS STRUCTURES
The business structure you choose influences everything from day-to-day operations, to taxes and how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.
Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability.
You'll need to choose a business structure before you register your business with the state. Most businesses will also need to get a tax ID number and file for the appropriate licenses and permits.
Choose carefully. While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications.
Consulting with business counselors, attorneys, and accountants can prove helpful.
Sole proprietorship
A sole proprietorship is easy to form and gives you complete control of your business. You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business.
Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can't sell stock, and banks are hesitant to lend to sole proprietorships.
Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.
Partnership
Partnerships are the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).
Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won't be responsible for the actions of other partners.
Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.
Limited liability company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.
LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits.Profits and losses can get passed through to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.
LLCs can have a limited life in many states. When a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership — unless there's already an agreement in place within the LLC for buying, selling, and transferring ownership.
LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.
Corporation
C corp: A corporation, sometimes called a C corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting. Unlike sole proprietors, partnerships, and LLCs, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice — first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.
Corporations have a completely independent life separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the C corp can continue doing business relatively undisturbed.Corporations have an advantage when it comes to raising capital because they can raise funds through the sale of stock, which can also be a benefit in attracting employees.
Overall, corporations can be a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to "go public" or eventually be sold.
S corp: An S corporation, sometimes called an S corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates. Not all states tax S corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax S corps on profits above a specified limit and other states don't recognize the S corp election at all, simply treating the business as a C corp. S corps must file with the IRS to get S corp status, a different process from registering with their state.
There are special limits on S corps. Check the IRS website for eligibility requirements. You'll still have to follow the strict filing and operational processes of a C corp. S corps also have an independent life, just like C corps. If a shareholder leaves the company or sells his or her shares, the S corp can continue doing business relatively undisturbed.
Overall, S corps can be a good choice for a businesses that would otherwise be a C corp, but meet the criteria to file as an S corp.
B corp: A benefit corporation, sometimes called a B corp, is a for-profit corporation recognized by a majority of U.S. states. B corps are different from C corps in purpose, accountability, and transparency, but aren't different in how they're taxed. B corps are driven by both mission and profit. Shareholders hold the company accountable to produce some sort of public benefit in addition to a financial profit. Some states require B corps to submit annual benefit reports that demonstrate their contribution to the public good.
There are several third-party B corp certification services, but none are required for a company to be legally considered a B corp in a state where the legal status is available.
Close corporation: Close corporations resemble B corps but have a less traditional corporate structure. These shed many formalities that typically govern corporations and apply to smaller companies. State rules vary, but shares are usually barred from public trading. Close corporations can be run by a small group of shareholders without a board of directors.
Nonprofit corporation: Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don't pay state or federal income taxes on any profits it makes. Nonprofits must file with the IRS to get tax exemption, a different process from registering with their state.
Nonprofit corporations need to follow organizational rules very similar to a regular C corp. They also need to follow special rules about what they do with any profits they earn. For example, they can't distribute profits to members or political campaigns.
Nonprofits are often called 501(c)(3) corporations — a reference to the section of the Internal Revenue Code that is most commonly used to grant tax-exempt status.
Cooperative
A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners. Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote.
Combine different business structures
Designations like S corp and nonprofit aren't strictly business structures — they can also be understood as a tax status. It's possible for an LLC to be taxed as a C corp, S corp, or a nonprofit. These arrangements are far less common and can be more difficult to set up. If you're considering one of these non-standard structures, you should speak with a business counselor or an attorney to help you decide.
FORMING AN LLC
WHAT IS AN LLC?
An LLC, or Limited Liability Company, is a type of business structure that provides its owners with the benefits of both a corporation and a partnership. This means that the owners, known as members, are shielded from personal liability for the company's debts and legal obligations.
LLCs are a popular choice for small businesses and startups because they offer a flexible management structure and are relatively easy to set up and maintain. In an LLC, the members can choose to manage the company themselves or hire a manager to handle day-to-day operations.
One of the benefits of an LLC is the pass-through taxation, which means that the profits and losses of the company are passed through to the individual members and taxed on their personal tax returns. This can help reduce the overall tax burden for the members.
It's important to note that the specific regulations and requirements for forming and operating an LLC can vary by state, so it's always a good idea to consult with a legal professional before starting one.
HOW DO I START AN LLC?
To start an LLC, you will typically need to follow these steps:
Choose a name for your LLC: Your LLC's name must be unique and comply with your state's rules and regulations.
File Articles of Organization: This is a legal document that you will need to file with the Secretary of State's office in the state where you plan to form your LLC. It includes basic information about your LLC, such as its name, address, and the names of its members.
Create an Operating Agreement: An Operating Agreement is a legal document that outlines the ownership and operating procedures of your LLC. While this isn't always required by law, it's a good idea to have one in place to help prevent misunderstandings or disputes among members.
Obtain any necessary licenses and permits: Depending on your business type and location, you may need to obtain specific licenses or permits to operate legally.
Get an EIN: An EIN, or Employer Identification Number, is a unique identifier for your business that's used for tax purposes. You can apply for an EIN with the IRS.
Open a bank account: You'll need a separate bank account for your LLC to keep your personal and business finances separate.
The process of starting an LLC can vary depending on your state and business type, so it's always a good idea to consult with a legal professional or accountant to ensure you're taking all the necessary steps.
WHAT IS AN EIN?
An EIN (Employer Identification Number) is a unique nine-digit number assigned by the IRS to identify a business entity for tax purposes. It's also commonly referred to as a Tax ID or Taxpayer Identification Number.
Most businesses, including LLCs, are required to obtain an EIN. It's used to identify your business when you file tax returns, pay taxes, and communicate with the IRS. The EIN is also required if you have employees or if you operate as a partnership or corporation.
You can apply for an EIN online, by mail, by fax, or by phone through the IRS. The application process is free, and you'll typically receive your EIN immediately after applying online. Once you have your EIN, you'll need to use it on all tax-related documents and correspondence with the IRS.
WHAT ARE THE COMPLIANCE REQUIREMENTS FOR AN LLC?
The compliance requirements for an LLC can vary depending on the state and local laws where the LLC is registered and operates. However, some of the most common compliance requirements for an LLC include:
Annual reports: Many states require LLCs to file an annual report with the Secretary of State's office. This report typically includes basic information about the LLC, such as its name, address, and names of its members.
Registered agent: Most states require LLCs to have a registered agent, who is a person or company designated to receive legal and tax documents on behalf of the LLC.
Business licenses and permits: Depending on the type of business and location, an LLC may need to obtain specific licenses or permits to operate legally.
Taxes: LLCs must file tax returns with the IRS and pay any necessary taxes. Depending on the number of members and the structure of the LLC, the LLC may be taxed as a sole proprietorship, partnership, or corporation.
Operating agreement: While an operating agreement is not always required by law, it is recommended to have one in place to outline the ownership and management structure of the LLC.
Compliance with state laws: LLCs must comply with all applicable state laws and regulations, including those related to employment, contracts, and other business operations.
It's important for LLC owners to stay informed about their state's compliance requirements and ensure that they are meeting all necessary obligations to avoid penalties or legal issues.
WHAT IS THE DIFFERENCE BETWEEN A MEMBER AN A MANAGER IN AN LLC?
In an LLC, the owners are called members, and they are the individuals or entities that have an ownership interest in the company. The members can be individuals, corporations, or other LLCs.
On the other hand, a manager is an individual or entity appointed by the members to manage the day-to-day operations of the LLC. In some cases, the members may choose to manage the LLC themselves, in which case there may not be a separate manager.
There are two types of LLC management structures: member-managed and manager-managed. In a member-managed LLC, all members have the authority to make decisions on behalf of the company. In a manager-managed LLC, the members appoint one or more managers to make decisions and run the company.
The key difference between a member and a manager in an LLC is their role in managing the company. Members have ownership and decision-making rights, while managers are responsible for the day-to-day operations of the LLC. It's important to note that the specific roles and responsibilities of members and managers can vary depending on the operating agreement and state laws.
WHAT IS THE DIFFERENCE BETWEEN AN LLC & AN S-CORP?
Both an LLC and an S-Corp (short for S Corporation) are types of business entities that offer limited liability protection to their owners. However, there are some key differences between the two:
Ownership: LLCs can have an unlimited number of members, who can be individuals, corporations, or other LLCs. S-Corps, on the other hand, can only have up to 100 shareholders, who must be individuals, estates, certain trusts, or tax-exempt organizations.
Taxation: LLCs are typically taxed as pass-through entities, meaning that the profits and losses of the business are passed through to the members and taxed on their individual tax returns. S-Corps are also pass-through entities, but they have more restrictions on how they distribute profits and losses to shareholders.
Management: LLCs can be managed by the members or by a manager appointed by the members. S-Corps have a board of directors who manage the company's operations.
Formality Requirements: S-Corps have more formal requirements such as the adoption of bylaws and holding of annual meetings. LLCs are typically more flexible in terms of their management and ownership structure and have fewer formalities to maintain.
Eligibility: To be eligible for S-Corp status, the company must meet certain criteria, such as being a domestic corporation, having only allowable shareholders, and having no more than 100 shareholders.
The choice between an LLC and an S-Corp depends on a variety of factors, including the company's size, ownership structure, and tax goals. It's important to consult with a legal or tax professional to determine which option is best for your specific situation.
WHAT IS THE ADVANTAGE OF AN LLC VS. SOLE PROPRIETORSHIP?
There are several advantages of forming an LLC over operating as a sole proprietorship, including:
Limited Liability: One of the main advantages of an LLC is that it provides limited liability protection to its owners. This means that the personal assets of the owners are protected from the debts and liabilities of the business. In contrast, sole proprietors are personally liable for all business debts and legal issues.
Separation of Personal and Business Assets: LLCs require a separate bank account and accounting records from the personal accounts of the owners, which helps to keep personal and business assets separate. This separation of assets is important for maintaining the limited liability protection of the LLC.
Flexibility in Taxation: LLCs have flexibility in how they are taxed, and can choose to be taxed as a sole proprietorship, partnership, S-Corp or C-Corp. This flexibility allows LLC owners to choose the tax structure that best suits their business and financial goals.
Credibility and Professionalism: An LLC is a recognized legal entity and can provide credibility and professionalism to a business. It may be easier for an LLC to obtain financing, contracts, and business partnerships.
Continuity: An LLC can continue to exist after the death or departure of its owners. This means that the business can continue to operate and generate income, rather than being dissolved like a sole proprietorship.
Overall, an LLC provides more protection and flexibility for its owners than a sole proprietorship. However, it's important to note that forming an LLC requires more paperwork and formalities, and may involve additional costs such as filing fees and professional services.
DO I HAVE TO FILE TAXES?
Yes, as an LLC owner, you will generally be required to file taxes for your LLC. The specific tax requirements and forms will depend on how your LLC is taxed.
By default, single-member LLCs (LLCs with only one owner) are taxed as a sole proprietorship, and multi-member LLCs (LLCs with more than one owner) are taxed as a partnership. In these cases, the LLC itself does not pay federal income taxes, but rather the owners report their share of the LLC's profits and losses on their personal tax returns using IRS Schedule C (for sole proprietors) or IRS Form 1065 (for partnerships).
However, LLC owners also have the option to elect to be taxed as a corporation, either as an S-Corporation or a C-Corporation. In these cases, the LLC itself will be required to file its own tax return and pay taxes on its profits, and the owners will also report their share of the LLC's profits and losses on their personal tax returns.
It's important to note that state tax requirements for LLCs can vary, so it's a good idea to check with your state's taxing authority to ensure that you are meeting all the necessary tax filing requirements. Additionally, LLC owners may be responsible for paying other taxes such as self-employment taxes, sales taxes, and payroll taxes if they have employees.
WHAT IS A REGISTERED AGENT & IS IT REQUIRED?
A registered agent is a designated individual or business entity that is authorized to accept legal documents, such as lawsuit papers and tax notices, on behalf of a business. Every state requires that all registered business entities, including LLCs and corporations, have a registered agent.
The registered agent must have a physical address in the state where the business is registered, and be available during normal business hours to accept legal documents. The purpose of the registered agent is to ensure that legal notices and other important documents are properly delivered to the business, so that the business can respond to them in a timely manner.
The registered agent can be an individual, such as one of the LLC members or a trusted employee, or it can be a professional registered agent service. Some LLCs choose to use a professional service, as it can help ensure that legal documents are properly handled and reduce the risk of missing an important notice or deadline.
It's important to note that the registered agent's name and address are part of the public record, and may be listed on the Secretary of State's website or other public directories. Therefore, some businesses may prefer to use a registered agent service to maintain their privacy.
In summary, having a registered agent is required for LLCs and other business entities, and is an important part of ensuring that the business receives important legal notices in a timely manner.
WHAT DOES DBA MEAN? CAN I HAVE ONE AS AN LLC?
Yes, an LLC can have a DBA, which stands for "Doing Business As". A DBA is a registered trade name that a business uses in addition to its legal name. It's often used by businesses that want to operate under a different name than their legal name, for branding or marketing purposes.
For example, if your LLC's legal name is "ABC, LLC", but you want to operate under the name "XYZ Services", you can file a DBA registration to use that name in your business dealings.
To register a DBA for your LLC, you'll need to file a "Certificate of Assumed Name" or similar document with the state or local government where your business is located. The requirements and fees for registering a DBA vary by state and locality, so it's important to check with your local government for specific instructions.
Once your DBA is registered, you'll be able to use it in your business dealings, such as on marketing materials, contracts, and invoices. However, it's important to note that a DBA does not provide any legal protection or liability protection for your business, and your LLC will still be responsible for all legal and financial obligations under its legal name.
GETTING A Domain name (www…)
If you want an online presence for your business, start by registering a domain name — also known as your website address, or URL.
Once you register your domain name, no one else can use it for as long as you continue to own it. It’s a good way to protect your brand presence online.
If someone else has already registered the domain you wanted to use, that’s okay. Your domain name doesn’t actually need to be the same as your legal business name, trademark, or DBA. For example, Springfield Electronic Accessories could register the domain name techbuddyspringfield.com.
You’ll register your domain name through a registrar service like GoDaddy.com etc. Consult a directory of accredited registrars to determine which ones are safe to use, and then pick one that offers you the best combination of price and customer service. You’ll need to renew your domain registration on a regular basis.
PROTECTING YOUR BUSINESS: Trademarks, Copyrights & More
WHAT ARE THE BENEFITS OF TRADEMARKS?
Exclusive use: A trademark gives the owner the exclusive right to use the registered mark in connection with the goods or services covered by the registration. This means that others cannot use a similar mark that may cause confusion among customers.
Brand recognition: Trademarks help build brand recognition and brand reputation by creating a unique identity and distinguishing your products or services from those of your competitors. A strong trademark can become one of your most valuable business assets.
Legal protection: Trademarks provide legal protection and help you enforce your rights against anyone who tries to use your mark without your permission. If someone infringes on your trademark rights, you can take legal action to stop them and seek damages.
Business expansion: Trademarks can help businesses expand into new markets, as they provide a level of credibility and trustworthiness to customers who may not be familiar with the business. A registered trademark can also make it easier to license or franchise your business.
Competitive advantage: Having a registered trademark can give your business a competitive advantage over others in your industry. A strong trademark can help you stand out in a crowded market and attract more customers to your business.
In summary, trademarks offer a range of benefits to businesses, including exclusive use, brand recognition, legal protection, business expansion, and competitive advantage.
WHO CAN FILE A TRADEMARK?
In the United States, anyone who uses a distinctive mark in commerce to identify their goods or services can file for a trademark. This includes individuals, businesses, corporations, partnerships, and other types of entities.
However, before filing for a trademark, it's important to ensure that the mark is eligible for registration and does not conflict with existing trademarks. The USPTO (United States Patent and Trademark Office) has specific guidelines for trademarks, and there are several factors to consider, such as whether the mark is unique, whether it is descriptive or suggestive, and whether it is likely to cause confusion with other marks.
If you are unsure whether your mark is eligible for registration, you may want to consider consulting with a trademark attorney who can provide guidance and help you navigate the trademark registration process.
HOW LONG DOES THE TRADEMARK APPLICATION PROCESS TAKE?
Here's a general overview of the trademark application process and estimated timeline:
Filing the application: The initial application can be filed online through the USPTO's Trademark Electronic Application System (TEAS). The filing process can take several hours or more, depending on the complexity of the application.
Review by the USPTO: After filing, the USPTO will review the application to ensure that it meets the requirements for registration. This can take several months, depending on the workload of the USPTO.
Office Action: If there are any issues or objections raised during the review process, the USPTO will issue an Office Action, which outlines the problems and gives the applicant a chance to respond. This can take several months, depending on the complexity of the issues.
Publication: If the application is approved, it will be published in the USPTO's Official Gazette, which is a weekly publication. This is to give others a chance to oppose the registration if they believe they would be harmed by it.
Registration: If there are no oppositions or other issues, the USPTO will issue a registration certificate. This can take several months after publication.
Overall, the trademark application process can take anywhere from several months to over a year, depending on the complexity of the application and any issues that may arise during the review process. It's important to be patient and prepared for potential delays.
HOW LONG DOES TRADEMARK REGISTRATION LAST?
In the United States, trademark registrations last for 10 years from the date of registration. After the initial 10-year period, the registration can be renewed for additional 10-year periods as long as the trademark is still being used in commerce and the renewal fees are paid on time.
It's important to note that maintaining a trademark registration requires ongoing use of the mark in commerce. If a trademark owner stops using the mark in commerce, the registration may be cancelled or become vulnerable to challenge.
Additionally, if a trademark owner fails to renew the registration on time or fails to file the required maintenance documents, the registration may be cancelled or expire. Therefore, it's important to stay on top of the registration renewal and maintenance requirements to ensure continued protection of the trademark.
WHAT IS THE DIFFERENCE BETWEEN A TRADEMARK AND COPYRIGHT?
Trademarks and copyrights protect different types of intellectual property, so the decision of whether to pursue a trademark or copyright will depend on the type of intellectual property you are seeking to protect.
A trademark is a word, phrase, symbol, or design that identifies and distinguishes the source of goods or services. If you are using a unique name, logo, or symbol to identify your business or products or services, you may want to consider seeking trademark protection. Trademarks are used to prevent others from using a similar mark that could cause confusion among consumers.
A copyright, on the other hand, protects original works of authorship, such as books, music, artwork, and software. If you have created a unique creative work, you may want to consider seeking copyright protection. Copyrights are used to prevent others from copying, distributing, or displaying your work without your permission.
In some cases, you may need both trademark and copyright protection. For example, if you have created a logo for your business, you may want to seek both trademark protection for the logo and copyright protection for any original artwork included in the logo.
It's important to note that the process for obtaining trademark and copyright protection is different, and it's best to consult with an intellectual property attorney to determine which type of protection is right for you and to ensure that your rights are adequately protected.
OPENING A BUSINESS BANK/CREDIT ACCOUNT
As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.
You can open a business bank account once you've gotten your federal EIN.
Most business bank accounts offer perks that don't come with a standard personal bank account.
Protection. Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds. Merchant services also offer purchase protection for your customers and ensures that their personal information is secure.
Professionalism. Customers will be able to pay you with credit cards and make checks out to your business instead of directly to you. Plus, you'll be able to authorize employees to handle day-to-day banking tasks on behalf of the business.
Preparedness. Business banking usually comes with the option for a line of credit for the company. This can be used in the event of an emergency, or if your business needs new equipment.
Purchasing power. Credit card accounts can help your business make large startup purchases and help establish a credit history for your business.
Find an account with low fees and good benefits
Some business owners open a business account at the same bank they use for their personal accounts. Rates, fees, and options vary from bank to bank, so you should shop around to make sure you find the lowest fees and the best benefits. Here are things to consider when you're opening a business checking or savings account:
Introductory offers
Interest rates for savings and checking
Interest rates for lines of credit
Transaction fees
Early termination fees
Minimum account balance fees
Here are things to consider when you're opening a merchant services account:
Discount rate: The percentage charged for every transaction processed
Transaction fees: The amount charged for every credit card transaction
Address Verification Service (AVS) fees
ACH daily batch fees: Fees charged when you settle credit card transactions for that day
Monthly minimum fees: Fees charged if your business doesn't meet the minimum required transactions
Payment processing companies are an increasingly popular alternative to traditional merchant services accounts. Payment processing companies sometimes provide extra functionality, like accessories that let you use your phone to accept credit card payments. The fee categories that you need to consider will be similar to merchant services account fees. If you find a payment processor that you like, remember that you'll still need to connect it to a business checking account to receive payments.
Get your documents ready to open a business bank account
Opening a business bank account is easy once you've picked your bank. Simply go online or to a local branch to begin the process. Here are some of the most common documents banks ask for when you open a business bank account. Some banks may ask for more.
Employer Identification Number (EIN) (or a Social Security number, if you're a sole proprietorship)
Your business's formation documents
Ownership agreements