The essentials of starting a small business : paperwork, legalities, and tax requirements
Shiry Benschar - Small Business Advocate
Starting a small business is an exciting venture, and for many the culmination of a dream. After you’ve done your research, created a business plan, and are ready to move ahead, you need to get to the nitty-gritty and file the paperwork to ensure that you set up your new business correctly. While paperwork, taxes, and legalities may not seem as enthralling as the other aspects of your business it is vital to get those in order to start off the right foot and protect yourself and your upcoming business in the long term. To make things easier, we have compiled some initial info and recommendations about those first steps, including links to tax forms and legal documents.
Choose a name for your business (DBA)
A crucial step in establishing any business is deciding on a name. It reflects what your business is about, and appears everywhere (business documents, advertising, tax filings, etc.). The requirements for registering your DBA or “Doing Business As” name varies according to your business structure (which we will cover), and location, so check with your state and local government offices and websites.
Before you select a business name, make sure it’s not taken. Most states have online databases to help with that. Visit your Secretary of State to inquire if your business name is free and how you need to register it. Also, check with the US Patent and Trademark Office to ensure your name is not trademarked or in use in another state.
Once you choose a name, you’ll want to protect it. Even if you don’t set up a website at first, reserve your name and register your site. Check the name availability at a domain registrar and reserve it. Also, you may want to trademark your name depending on your business.
Choose a business structure & register your business
You’ll need to determine what business structure is best for your small business since it influences taxes and deductions, personal liability, forms you need to submit, etc. Consult with a professional to weigh the pros and cons of each. There are many business structures, but most small businesses are a Sole Proprietorship, a Partnership, or a Limited Liability Company (LLC).
Federal Tax IDs and State IDs
Federal Tax IDs
No matter what business structure you choose for your small business, you will need to apply for a Federal Employer Identification Number (EIN) or Federal Tax ID To apply for an (EIN) fill out an SS-4 or apply online.
State Tax IDs and local registration:
Some states require you to register your business on a state level and create a State Tax ID. For a State Tax ID, visit your state’s website. You may also need to register your small business on a local level, so visit your local government website to better understand how you need to proceed.
A basic business structure where two or more people own a business together.
General partnership - profits and liabilities are shared equally.
Limited partnership -one partner has more control over the business and receives more of the profits but also has more of the liabilities.
Limited liability partnership - gives limited liability to every owner and protects each partner for the actions of other partners.
Partnership agreement:A partnership agreement details how the business will be run, profits split, and responsibilities shared. In order to ensure that you and your partner(s) have all the bases covered, work with a third-party legal professional on creating this document. Here is an example of a partnership agreement that can help you better prepare for the process. Your business also may require additional agreements such as:
An LLC is a kind of hybrid between sole proprietorship, partnership, and a larger corporation. An LLCs can protect you from personal liability in case your business faces bankruptcy or lawsuits.
What you'll need to create an LLC
The laws for creating an LLC vary from state to state, but most require the following:
Articles of organization: Outlines the essential information about your small business (Your business name, Type of business, Location of business, Management structure).
Appoint a registered agent: is a person or agency whom you designate to receive official & legal papers for your business including court papers, and government correspondence. The registered agent needs to be over 18 and have a physical street address in the state where the LLC is registered, while it is not a requirement many businesses choose to hire the services of a registered agent. Contact your Secretary of State for a list of registered agents or look for a service online.
Operating agreement: while this is not mandatory, it dictates how your business will be run, and key financial and functional decisions. In its absence, State laws will govern how the company will run.
Having a business bank account is an important step in establishing your new small business. It keeps your personal finances separate from the business, qualifies you for certain benefits and funding, and helps you look more professional. The most common bank accounts for small businesses include:
Business checking account
Business savings account
Business credit card account
Business merchant services account - to accept credit and debit cards from customers.
Depending on your business structure, you will need some or all of the following documents to open a business bank account
Federal Employer Identification Number (EIN)
State or local Tax IDs or registration papers (if applicable)
DBA (doing business as name)/Certificate of assumed name
Articles of organization
Organize your bookkeeping from the get-go
In many movies and tv shows, we have seen the hapless small business owner manage their receipts and finances in a shoe box. In real life, however, it is vital to set up an organized system for lawfully recording all business transactions. Whether it is paying your business expenses, accepting payments from customers, or getting paid by other businesses, having an organized filing and bookkeeping process will help you down the line when you are doing your taxes or if you have legal questions.
As a new small business owner, implementing an online process to pay business bills saves precious time and allows you to be in control of your payments while you manage them all from one digital and organized place. You can schedule both one-time and recurring payments in advance to know exactly when they will go out, thus keeping track of your transactions, and improving your cash flow.
Set up insurance for your small business
Ensure that you and your business are protected from unexpected costs like accidents, lawsuits, and more. Depending on your type of business, you may be required by law to purchase certain types of insurance. Some common insurance available for small business includes:
General liability insurance - suitable for all types of businesses. Protects against financial loss as the result of physical injury, property damage, medical expenses, lawsuits, settlement bonds, or judgments.
Product liability insurance - specifically for those small businesses that manufacture and/or sell products. Protects you if your products are defective or cause injury.
Professional liability insurance - helps to cover losses in case your business is sued for malpractice, errors, or negligence.
Commercial property insurance - If your business owns property, commercial property insurance protects your business in case of fire, natural disasters, accidents, or vandalism.
Home-based business insurance - if you run your business from home, this insurance is added to your home-owners insurance.
File tax and insurance for employees
If you are planning on hiring employees, make sure that you file the correct tax and insurance forms.
Workers compensation insurance - in case your employee is injured while on the job. Consult with your business insurance provider to determine what is the most appropriate policy for your business.
Unemployment insurance - this insures your employees in case of job loss or termination and is paid as part of your payroll tax.
Disability insurance - if your employee is injured or becomes ill and cannot work for a period of time, disability insurance provides your employee with a percentage of their income.
Note: If you are planning to hire contractors, freelancers, or other service providers and pay them more than $600, you will need to file a 1099MISC form. Melio helps you easily classify and export a .CSV fileof all payments relevant to your 1099, forms making it easier to prepare your taxes.
If you’re about to open a small business you’ll probably find that there is a lot to do to get started. Making time to organize all the necessary paperwork and get your ducks in a row will free you from future problems and help build a foundation for long-lasting business success. Now get out there, put in the work, and remember to have fun. 🙂