Lately, I have received numerous questions about how to formally organize a business. The inquiries have ranged from what is required to organize, to what products or services people should sell. I can help answer the former but if I had the answer to the latter, then I would be doing that myself :)
To keep this post easier to read I am splitting it into two parts. I did my best to write this in a logical order for first time business owners to better understand, but some may argue that the steps outlined can be performed in a different order. Your order may vary as requirements will differ from county-to-county and state-to-state.
Of course, I want to disclaim up front that I’m not a lawyer and I’m not giving any legal advice here, just basic information on the typical procedures to organize a business entity. You wouldn’t start a crazy diet or exercise routine without seeking medical clearance first, would you? I didn’t think so. Be smart on this matter and seek a licensed professional attorney before starting any business or organization process.
Below are the first 5 steps that any entrepreneur will want to know and understand before starting a business.
#1 Decide what you want to do or sell – Cost $0
This is probably the most critical component of any business. You can’t have a business if you don’t have a product or service to sell. Maybe you are phenomenal at underwater basket weaving and want to sell your baskets online. Or more practically, maybe you’re a killer golfer and want to offer training services. Either way, you need to decide what you want to sell. Every business is unique and will need to follow different rules in order to be compliant and successful.
#2 Pick a business name – Cost $0
This may not seem like a critical step, but in reality it is. A name can carry so much weight with it. It can represent goodwill, present a professional image, or even become so catchy it becomes a household name (think Band-Aid). You can be as creative or generic as you choose. My personal opinion is to keep it simple in the beginning; you can always upgrade or expand in the future. There is a catch here though; the name you choose cannot be used by another entity. I won’t go into too much detail, but clearly you won’t be able to start a company called “Microsoft”, because not only is the name taken, I’m fairly confident it’s a registered trademark. Most states will not let you use a name that has already been taken (at least in that state). Although a name may be available in your home state, if for some reason it is trademarked, you’re likely to receive a letter one day asking you to stop using the name and/or likeness. You can do a more extensive name search nationwide, but that's usually not necessary in your early years.
#3 Choose a structure – Cost varies
Now that you have something to sell, and a business name to go with it, you will want to decide on a business structure. The most common business structures are:
1) Sole Proprietorships
4) S Corporations
5) Limited Liability Company (LLC)
The IRS has done a fantastic job of explaining each different structure so I have provided the respective links for each structure for your reference. The type of business you own and operate will largely help decide what structure makes the most sense for your business. There is no one-size-fits all approach here and you will reap significant reward by consulting with a licensed attorney, as well as a licensed CPA, to discuss the legal & tax benefits and drawbacks to each structure.
Once you have determined your business structure, there will be some administrative paperwork to file. The amount of paperwork mostly depends on the structure you elect. I can’t stress enough the value and benefit of having a legal expert guide you through the process to ensure nothing is missed. Do-it-yourself services such as LegalZoom are perfect for those familiar and comfortable with the process. If this is your first time though, consider the expense of professional help as an investment in your learning and understanding of the business world.
#4 Register your business – Cost varies (usually about $25)
Next you will want to register your business with your local county. You will need to obtain a DBA or “Doing Business As”; aka “Certificate of Assumed Name” here in North Carolina. This certificate allows you to legally represent yourself under your business name. It is a fairly simple process, but it differs slightly for every county and state so check with your local authorities regarding what you need to do to satisfy this requirement.
#5 Obtain a federal tax ID # - Cost $0
Are you starting to see the bigger picture yet? You have a product, a name, a corporate structure, you registered with your local authorities, and now, you are finally ready to register with the federal government. Let me be very clear, no matter what, YOU SHOULD OBTAIN A FEDERAL TAX ID # (also known as an EIN). Without this number you will not only potentially be handing out your social security number to everyone you do business with, but you will not be considered anything other than a Sole Proprietor. If you do nothing else, file an SS-4 for an EIN. It’s ridiculously easy and can be done online instantly here.
That’s all I’m sharing this week. Check back next week for the final 5 steps on how to organize a new business!
Did I miss something or ignore a critical step? Or was I immensely helpful and inspiring? Either way, leave your comments and questions below!