Starting a Business: What Kind of Business Should You Form?

Choose an entity type

When you initially form a new business, you need to consider what type of legal entity to use. Here are some of the more common examples:

  • LLC – Limited liability companies are some of the easiest to set up and maintain, and they are pass-through entities. This means that the profits and losses of the business are passed on to the individual owners on their personal tax returns. LLCs can be good for owning assets like real estate because of the protections they offer with “charge orders.”
  • S Corporation – An S corporation has many of the tax benefits of a C corporation, but has transfer taxes. This means that the profits and losses of the business are passed on to the individual owners on their personal tax returns. You can choose S corporation status by filing a simple document with the IRS after forming a corporation in your state.
  • Corporation C – A C corporation is the entity structure of publicly traded companies. Provides the maximum amount of fringe benefit deductions and a low corporate tax rate for a small corporation. However, it is the most difficult to install and maintain, and it is also double taxed. Double taxation means that profits are taxed first at the corporate level and then on individual shareholders’ tax returns.
  • General Society – It is a partnership between multiple owners, but all partners share responsibility, ownership and profits equally.
  • Limited liability company – It is a partnership between several owners that offers the possibility that some partners have limited liability, as well as limited participation in management decisions.
  • Single owner – This is where you simply operate on your own behalf, or do business personally as (DBA) another name that has not been officially formed as one of the other entity types (and therefore it is just you using an alias). Many people think that registering a DBA certificate with the local county office gives them a legal entity structure, but it does not. It is just a fake name for your sole proprietorship. (Note that corporations and other entities can file DBAs with their Secretary of State, but that’s different than what is meant here.)

Each of these types of entities has its pros and cons. Think carefully before operating as a sole proprietor. The reason is because a sole proprietorship subjects you to full personal liability. This means that if your business is sued, your home, your car, your personal savings, and just about everything else are at risk. Consider forming an entity that provides an additional level of protection for your personal assets.

Keep in mind that each state has different laws on entity types, and you must determine what your options are for the state in which you plan to form your business. Consult an attorney if your questions are not answered by your own research.

You can find out which entity structures are available by visiting the Secretary of State (SOS) website for the state in which you plan to form the company. We have put a lot of effort into creating an index for you of all Secretary of State websites throughout the United States (on our site below). Before proceeding to the next step, check your respective SOS website to research what type of legal structure may be best for your type of business.

Brainstorm entity names

Once you’ve determined the type of legal entity to use, brainstorm a few names for your business. Write 3-5 names now. In a later step, we will illustrate how to choose the best name.

  1. Search Secretary of State – Search to see if your name is available on the Secretary of State website for your business state of residence. If not, you should cross that name off your list. The reason is because SOS will not allow you to form a company under that name, regardless of whether the existing company belongs to your industry or not. In other words, that name is taken and cannot be registered again in that state.
  2. Search the United States Patent and Trademark Office – Look to see if someone else has a USPTO trademark that is identical or similar to your name. If so, is it a really famous brand or do they belong to a similar industry, so that your customers can also be your customers for similar products? If yes to any of the questions, then you should cross that name off your list to err on the side of caution. Otherwise, continue with step 3 to find out more about the current name.
  3. Search Status Trademark Registration – Does anyone else have a trademark in the Trademark Registry of the state in which you plan to form the company? Each state maintains a trademark registry for companies that have registered that name in the state. You must repeat step 2, but for your state.
  4. Search in search engines – You should search one or more search engines like Google, MSN, and Yahoo to see if someone in your industry is already using the name.

Form the legal entity

Now that you have chosen the type of legal entity and determined what name to use for your business, it is time to file your documents with the Secretary of State for the state in which you plan to organize your business. Note that the state in which you form the

company does not have to be the same state in which you live. Some states have more business-friendly laws than others. However, such an explanation is beyond the scope of this plan.

You have several options for forming the company. You can hire an attorney, complete the documentation yourself from the SOS website, or hire another third-party service, such as American Incorporators. to file the papers for you. There are many other companies, such as Socrates Media and Legal Zoom, that sell forms to help you complete the training yourself.

Get an EIN from the Internal Revenue Service

As soon as you get confirmation from your SOS status that the business has been officially formed, you must obtain an employer identification number from the IRS. Register for an EIN on the IRS website or by calling the EIN department at: (800) 829-4933.

An EIN is a social security number for a business. You will need it to open bank accounts, file taxes, etc.

Get other necessary licenses

You should also make sure you have the licenses required by your state for the type of business you are operating. For example, some types of businesses must be licensed before operating, such as lawyers, insurance agents, restaurants, day care centers, etc. Your county government office can point you in the correct address if you are unsure.

Create the company log book

The time has come to set up the company log book.

The easiest way to create and organize your business log book is to purchase one from a service like Legal Zoom or Socrates Media. The “corporate kits” usually have a nice folder, sample forms, folders to store the different types of documents that you must keep, stock certificates printed with your company name (if applicable), and so on. You will need to keep company records for a period of time, so take the time to organize them in advance. you will be happy you did.

Document future deadlines

In the world of entrepreneurship, you have a lot of deadlines to keep track of to disregard the various government agencies. Estimated quarterly income taxes, annual or semi-annual operating statements with your state’s SOS, sales tax returns, employment returns, company tax returns (in addition to your personal tax returns), etc.

Business owners generally have to file estimated quarterly taxes with both the IRS and the home state. In other words, you will need to make income tax payments throughout the year to avoid being penalized if you didn’t pay enough at the end of the year. It is not enough to catch up at the end of the year. In fact, they can penalize you for not paying it in more uniform installments. You can find links for the 50 state Departments of Revenue and the IRS on our Innoventum website.

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