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Licensing & Registration: Making Your New Business Legal
Let’s cover the basics of legal business structures you’ll need to choose from, such as an LLC, C-corp, S-corp, sole proprietorship, and partnership. It’s important that you take the time to carefully read through this section, as it will affect how your company is structured as well as how you’ll pay taxes.
From there, we’ll cover how to register your business with DBAs and EINs. Lastly, we’ll take a look at the key licenses you’ll need to obtain before opening your doors. If you’ve already registered your business and obtained the proper licensing, head back to our Getting Started section for helpful information on navigating insurance and setting up your business plan.
Decide On A Legal Structure
The first step you’ll need to address on your way to registering your business is selecting a new business structure. Your business structure will affect the way you operate, how well your personal assets are projected, and determine how you handle taxes. You’ll want to ask yourself what your goal is in starting your company:
- To have a family business that I can pass down to my kids?
- To create a business that I can expand or franchise?
- Will I have investors and what kind of investment will it be?
There are a few different options to choose from, but the most common for service businesses is an LLC. As your business grows, however, you may want to switch to an “S” Corporation, or use the “S” corporation’s taxation model when you start out. More on that below.
An LLC enables the business owner to protect their personal assets and liabilities from any business concerns. With an LLC, your personal property is protected against lawsuits, creditors, trademark infringements, property damage, and other issues that may arise with your business.
This model also offers flexible taxation options. You can either choose an LLC pass-through (the default), where the amount of taxes you owe is based on the owner’s self-employment tax, or treat it like an S-corp where you’re taxed for the profit/loss of the business.
That way, if your business is bringing in a lot of money, you’re essentially treated like an employee of the business, which will reduce your self-employment tax. You can calculate which tax model would be cheaper for your business here.
A C-corp, meanwhile, allows your business to be a completely separate entity from shareholders and owners. This is the safest option when it comes to liability, carries a lower risk of an audit, and lenders and suppliers like working with them. However, you get taxed twice, once as the corporation and again on your dividend (pay, salary, bonus).
Subchapter “S” Corporation
A Subchapter Corporation – or “S” Corporation – has the same pros as a C-corp, but shareholders and owners are taxed directly in place of the business for profit/loss, so they aren’t taxed twice.
Register Your Business
Establishing an LLC
More than likely, you’ve decided to establish an LLC. Requirements can vary dramatically across states but you can easily find your state’s information here. Typically, registering your business as an LLC costs between $40-$500 depending on your state with the majority ranging from $50-$100. When establishing an LLC, it’s a good idea (but not required) to talk to a lawyer to make sure it’s done right and your personal assets are fully protected.
Decide On An Address
Register Your Business’s Name
A DBA, or “doing business as,” is a registered “nickname” a business can operate under, that isn’t the business’s legal name. Filing for a DBA allows you to operate your business under a name besides your own, and is separate from your name or your business’ legal, registered name. Unlike an LLC or sole proprietorship, this isn’t a business structure and provides no legal or asset protection; typically, you would be creating an LLC or sole proprietorship with a DBA name.
A few states may not require a DBA as part of your business registration. Before you register your name, make sure it’s eligible for use. You may also want to trademark it. A DBA does not automatically protect the name from being reused elsewhere.
A DBA can also be used by existing LLCs and corporations to register other businesses under them. For example, if you own a plumbing business in Texas and want to open another one under a different name, you would file a DBA. It keeps both the first and second plumbing businesses as one legal entity but with two separate names.
Get an EIN
Next, you’ll need to head to the IRS’s website to register your business and obtain an EIN (Employer Identification Number). Having an EIN is essential for filing your taxes and functions similarly to a social security number, but under certain circumstances you may not need one.
After you’ve obtained your EIN, you’ll need to make sure that you’ve applied for all the correct licenses and permits. For an easy and pain-free way to search for license and permit requirements, visit the U.S. Small Business Administration’s website.
Most small businesses will require a combination of licenses and permits from both federal and state agencies. The requirements — and fees — vary based on your business activities, location, and government rules. Because of the inconsistencies and variations surrounding licensing in the U.S., it is important to always check with your local licensing authority.
The fee and specific license you need depend on the type of work you’ll be doing and where you live. Some states are licensed by a state licensing body, others at the local level (city, county).
Usually you’ll only need to fill out an application and pay a fee, but in some states, you may also need to take exams or submit other paperwork to receive a license.
Trade Licensing Guides
This will depend on your location, but businesses usually require a general license to operate, which is called a business license. It’ll most likely be free, but you may need to pay a small fee to obtain the license.
Obtaining your business license and registration is an essential (and sometimes frustrating) part of starting your business. But it’s a lot easier if you make sure you understand what all goes into each and what documents you’ll need for them.
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