Understanding how to form a business involves the following steps:

  1. Create a business plan.
  2. Assess your finances.
  3. Choose an appropriate business name.
  4. Decide on a business structure.
  5. File formation documents with the state and pay required fees.
  6. Obtain necessary permits and licenses.
  7. Take care of tax issues.

Depending on the type of business structure you form, you may need to follow additional steps, such as issuing stock, appointing directors, and creating bylaws.

You have a lot of decisions to make when you start a business. One of the most important decisions you'll make is which type of business you want to form. There are pros and cons to each business structure, so look at each from tax and liability standpoints.

Business Plan and Finances

Ask yourself the following questions as part of creating a well-written business plan:

  • What's the purpose of my business?
  • Who are my customers?
  • How will I finance my startup costs?
  • What are my end goals?

A business plan can help you figure out how to overcome potential problems and what you need to sustain your new venture.

You need to determine how you'll cover the costs of starting a business. Will you have to borrow money, or do you have the means yourself? Do you have money set aside to support yourself if you leave your current job to focus on your new company?

Getting a commercial loan from a bank is one way to get the money you need, but it's not always easy to secure this type of financing. You may look at alternative lenders or apply for financing through the Small Business Administration.

Deciding on a Name and Business Structure

Your business name must comply with your state's naming rules. Contact your state office to find out what the specific rules are. You must also make sure your business name doesn't infringe on someone's trademark.

It's not unusual to spend a lot of time trying to come up with the perfect name. Don't agonize over this part of forming the business. All the time you spend waiting to find the right name can be time you spend making money.

You must choose a business structure before you can register it. The type of business you operate affects how you'll file taxes and any impact on your personal liability should something go wrong.

If you plan to run the business by yourself and be responsible for all obligations and debts, you'll operate a sole proprietorship. A partnership is run by two or more business owners, who share liability.

To keep your personal liability separate from your business obligations, consider forming a corporation. The business is treated as a separate entity from its owners, and it can pay taxes, own property, assume liability, and enter into contracts. It can also sue and be sued.

A common business type for small businesses is the limited liability company, or LLC, which enjoys the legal protections of a corporation and the tax benefits of a partnership.

You'll file formation documents with the state to register your new business. In many states, you can apply online, by mail, or in person.

Licenses, Permits, and Tax Issues

After the state approves your registration, you'll have to obtain any required permits and licenses. You may need a business license, also called a tax registration certificate.

You may also need any or all of the following:

  • Employer Identification Number, or EIN
  • Seller's permit
  • Zoning permit

An EIN is a nine-digit number that the IRS uses to identify your business. You'll only need one if you hire employees or start an LLC, partnership, or corporation. Even if you're not required to have an EIN, you may want to obtain one anyway. It adds some protection against identity theft since you can use it instead of your Social Security Number in the course of running a business. Plus, it's free and simple to get an EIN.

You can find a lot of information relating to permits, licenses, and taxes at your state department of taxation website.

Some business forms, such as LLCs, are relatively simple and inexpensive to form, while you may need professional help to start other types. Make sure to follow your local and state guidelines to stay in compliance.

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