How to Turn Your Small Business into a Legal Entity

Congratulations, you’re ready to start your own business! But how do you actually create that business as a legal entity? This primer covers the basics of making sure you've dotted your i's and crossed your t's. 

1. Name your business

Your business’s name is important, but choosing it shouldn't stop you from moving forward. Who even knew what a “google” was before Google? Make sure the name is easy to remember and isn’t offensive in any language.

2. Pick the location of your business

Are you working from your home, a retail front, a coworking space or business park? Your location can change over time, but you will need an address before registering your business.

3. Choose your legal entity. When you choose a legal entity you should consider ease of starting and maintaining the business, how taxation rules will affect your finances and your personal liability and plans for partnering and growth. The most common legal entities include:

Sole Proprietorship

  • According to the IRS, a sole proprietor is someone who owns an unincorporated business by himself or herself.
  • If you have sold a good or service and have not registered your business otherwise, you are a sole proprietorship.

Partnerships

  • A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes to the business and expects to share in the profits and losses of the business.
  • It is taxed similarly to a sole proprietorship.  

Limited Liability Company (LLC)

  • LLCs are registered through the state and each state has a unique process.
  • They provide a separation of the personal from the business.
  • Unlike an S corporation or C corporation, LLCs are structurally flexible with greater taxation options.

S corporation

  • Like LLCs, S corporations provide a separation between the personal and business.
  • S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.

C corporation

  • While C corporations, also known as corporations, are the most common entity in the U.S., very few small businesses are registered as a C corp.
  • Like LLCs and S corporations, C corporations provide a separation between the personal and business.
  • They are taxed separately from their owners.

Do you have a lawyer or accountant? Ask for their feedback.

4. Register! Each state and city have their own processes. Need additional help? Find your local resource provider.

5. Get your Employer Identification Number (EIN)

  • It’s a free and easy process done through the IRS.
  • It’s like the social security number for your business.
  • It is not required for sole proprietorships - but it is recommended so you don’t have to hand out your social security number.

6. Are you in a profession that requires additional regulation? Everything from beauticians to lawyers to home-based daycare centers require additional regulation. Don’t forget to check with your industry association and local, state and federal regulations to make sure you have the certificates you need.

 

Legal licensing and permitting