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Six-Week Start-Up: A Step-

The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything

Small Business Start-up Guide: A Surefire Blueprint to Successfully Launch Your Own Business

The Small Business Start-up Kit (Law for All Series)

Legal Forms for Starting and Running a Small Business

Previous:
How to Get Funding for Your Business

Next:
How to Get Your Business Off the Ground

First Steps: Incorporation and More

When you start a business, you have several options for how to account for and pay taxes on money that the business generates. Among the key issues to consider is whether to incorporate—to create a separate business entity that keeps your personal finances apart from your business finances. There are a number of options for organizing your business, each of which involves a different legal structure.

Legal Structures for Incorporation

As part of the process of officially starting a new business, you need to choose how you want to structure your company, which is typically based on whether other people will also own a stake in the business. The various legal structures to choose from include:

Sole proprietorship: This is suited to one-person companies. Little paperwork is involved to set one up, but you have no protection from lawsuits because you and your company are one and the same.
Partnership: This can be a good option for businesses involving two or more people who will share responsibilities and ownership, but it increases your personal liability.
Limited liability company: This option limits personal liability while providing a more flexible, less complicated structure than a corporation.
Professional corporation: This is an option for only a few licensed professions, such as medicine, dentistry, and architecture. Unlike other structures, it provides liability protection for errors made by other partners.
S corporation: Available for virtually any size or type of business, this option allows business losses to pass through to the owners’ personal taxes, while still providing legal protection.
C corporation: The most complex and paper-generating structure, this is also the one preferred by investors and venture capitalists. It’s expensive to set up and maintain.

Regardless of the business’s legal structure, you should protect yourself from the dissolution of the company in the event of a member’s departure by having a buyout agreement.

This table can help you decide which structure makes the most sense for you:

Structure	Pros	Cons
Sole proprietor-ship	Cheap and easy to set up; record-keeping is simple	Provides no legal protection if you’re sued, as you and your business are one and the same
Partnership	Easy to set up; you don’t have to register with the state and pay fees, as LLCs and corporations do; you have flexibility to give one or more partners more or less authority, responsibility, and percentage of profits	You are personally liable for all business debts, including those incurred by your partner(s); more difficult to get financing than as a corporation
Limited liability company (LLC)	Offers same protection as a corporation but has more flexibility; unlimited number of members allowed; avoids double taxation (when both company and individual are taxed on earnings)	More complex than a sole proprietorship or partnership; can’t go public later without converting to a corporation first
Professional corporation (PC)	Protects members from liability due to the actions of other members—the opposite of a C corporation, which makes all members equally responsible	Available only to a short list of licensed professionals (this list varies from state to state); does not protect against liability for your own actions
S corporation	Provides protection of personal assets like a corporation but tax treatment like a sole proprietorship or partnership, allowing the pass-through of business losses to reduce your personal income; no corporate taxes	The corporation can deduct the cost of any benefits paid to shareholders owning 2% or more, but the value of those benefits are added back to the individual’s income; no more than 75 partners/owners are permitted
C corporation	Owners are protected from liability; income splitting is possible, where the first $75K of corporate income is taxed at a lower corporate rate and the rest taxed at a higher individual rate; benefits are deductible to owners	Profits are taxed at both the corporate and individual level, known as double taxation; more expensive to set up; more complicated to manage because of government regulations and filings

Choose a Company Name

In order to file articles of incorporation, the official documents filed with your state that register your business and make it official, you’ll need to give your business a name. Depending on the structure (sole proprietorship, legal liability company, etc.) that you’ve chosen for your company, you may also need to register its name at the county, state, and/or federal level. As part of the process of registering the business’s name (if it’s a made-up name, as opposed to your own legal name), you’ll have to confirm that no other business is using the name. Many states have an online database that makes this type of research fast and easy. Some of the best company names share some common characteristics. They’re:

Easy to pronounce: If the name is easy for customers to say or spell, you’re more likely to build successful word-of-mouth advertising for your business.
Self-explanatory: The best names tell customers what kind of business you own, rather than being so vague as to be unclear and forgettable. For example, the name Underwater Pet Shop tells customers they’re likely to find fish for sale there, whereas the name Patricia’s Creations leaves us wondering: is Patricia creating quilts? Wedding cakes? Custom stationery?
Clever: Combining a cliché or pop culture reference with the purpose of your business will be more memorable than a more obvious choice. Just compare Rapunzel’s Castle with Hair Salon.
Brief: Short, concise names are easier for customers to spot and remember than long ones.
Translatable: Make sure your company name, when translated into other languages, won’t convey the wrong impression or cause offense.

Request an Employer ID Number (EIN)

Whether you’re a sole proprietorship or C corporation, you can request an employer ID number (EIN) from the U.S. government. An EIN, also known as a tax ID number, is the unique code that the government assigns to each business to help track tax payments. If you’re operating as a sole proprietorship, however, you can choose to use your existing Social Security number instead, but you may not want to. To protect such personal information, you may want to go ahead and request a nine-digit EIN, which you’ll use to make tax payments. All other types of businesses are required to have an EIN. You can request one online at www.irs.gov.

Set Up a Business Bank Account

To ensure that the government views your business as a for-profit venture and not a hobby, you need to clearly separate your personal and business-related financial affairs. As a business owner, you’re entitled to deduct virtually all activities and expenses associated with starting up and running a company, but as a hobbyist, you can’t deduct any expenses. For that reason, you’ll want to set up a totally separate account for all business income and expenses. Check out several banks that are convenient to your home or office and evaluate:

Fees: This includes monthly service fees, transaction fees, and overdraft charges.
Speed: How quickly do they credit deposits you’ll be making: same day or longer?
Hours of operation: Are they convenient?

Once you’ve registered your business name and have received permission from the appropriate agency to use it, take your paperwork to a bank to set up your account.

Choose a Location

Many companies get their start in a spare bedroom, basement, or garage. Some stay there, and others eventually move out into commercial space. To decide what kind of location is best for you, think about:

How much space you really need
Whether you’ll have employees
Whether you’ll have equipment that is large or noisy
How much time you’ll be spending at work versus at the customer’s site
Whether you need to display your inventory, and how much you have
What your budget can allow

If you decide to set up shop in rented space, call a commercial realtor for help in identifying possible locations.

File Patents and Register Copyrights

To protect your products or services from being copied or stolen, look into obtaining one of the following:

Patent: A patent prevents others from copying an invention for 20 years from the date of application. If you’re starting a business to market and sell something you’ve invented, you’ll want to apply for a patent through the U.S. Patent and Trademark Office. You can file a patent application online at www.uspto.gov/ebc/index.html.
Copyright: A copyright provides the same type of protection as a patent for creative works. If you’ve written music, a play, an opera, a work of art or literature, or designed a semiconductor mask you aim to sell, you can protect it from being stolen or copied by filing a copyright application with the U.S. Copyright Office at www.copyright.gov/register.
Trademark: A trademark protects words, names, symbols, sounds, or colors that distinguish one company’s goods and services from another. Unlike patents, trademarks can be renewed forever as long as they’re in use. You can file a trademark application online with the U.S. Patent and Trademark Office at www.uspto.gov/ebc/index_tm.html.

Buy Insurance

Insurance protects you and your company from major expenses should something happen that interferes with your ability to do business. Make an appointment with an insurance broker to discuss whether you should have some or all of the following types of insurance:

Property insurance: This protects you from having to pay for major damage to your business location.
Liability insurance: This protects you from major expenses if someone becomes injured at your work site or as a result of one of your products or services.
Business owners policy: This is usually a package of several types of insurance, such as property, liability, and automobile, for example. When bundled together, they cost less than buying each policy individually.
Business interruption: This replaces revenue you would have earned if your business is shut down due to an accident or unforeseen event, such as a flood.
Key man: If you are an essential part of the company and you want it to continue operating should anything happen to you, key man insurance can help provide funds to keep the business running in the short term.
Automobile: If you plan to buy vehicles for use in your business, you’ll also want to have sufficient insurance to cover them in case of an accident on the job.